Link from today 2/26/2020 stating the number 1 red flag for getting an audit or inquiry letter is omitting a form (like the 1099Q)!
https://www.thestreet.com/personal-finance/taxes/red-flags-that-trigger-an-irs-audit?puc=yahoo&cm_ve...
So how can this be the best advice?
TurboTax does not ask enough questions about this and leaves us guessing what to do...or just pay excessive income tax and/or penalties.
However, if you look at the 1099-Q form in TurboTax (FORM MODE) you can see specific lines to enter amounts to offset the income that TT leave stranded on our kids returns:
Form 1099-Q, next to last section, section "Qualified Tuition Program (QTP) Computation of Taxable Distribution", line 2c (column 1 and 2)- "Adjusted Qualified Higher Education Expenses Applied".
This looks like just the place the IRS intended to put amounts in to offset the income tax and penalty. The section after that, "Distributions Not Subject to Additional 10% Tax" provides further cells to enter amounts to reduce the penalty ...including line 2e "Included only because qualified expenses were taken into account in determining American Opportunity or lifetime learning credit" (this is the 'exception' you sometimes hear about).
And wait - after entering amounts on lines 2c as above I JUST NOTICED that TurboTax actually entered the CORRECT AMOUNT for me on on line 2e (after I added a manual override in 2c for my 'qualified expenses').
So what is 'Qualified Higher Education Expense"?
There have been many posts on this. Does it include Room and Board when living at home?
Consider this... one household has a 'Magic College Room and Board jar' on the shelf. The parent told the student, "Put $500 per month cash in this jar to cover your Room and Board while living here to attend college". And then added, "I trust you so I won't have to check every month. I will use this money to pay for the space I could rent out, the utilities you use, the food you eat, etc". The parent then concluded, "And of course if you or anyone else in the family needs money for anything they are free to take money out and use it as needed". At the end of the year, the parent checked and there was no money in the jar. However, the parent kept a nice spreadsheet tracking these payments from their child. One parent used $500 per month for 9 months, totaling $4500 for the school year - more than enough to offset the deduction for the AOTC qualification on the parents return! So you can see in this case, the student CLEARLY had Room and Board expenses, even though they are not reflected on any form!
Note: Use the COA (Cost of Attendance) from the colleges website for guidance on appropriate amounts for Commuter Room and Board - they should supply a 'resident' and 'commuter' cost estimate.
To me, 'loan payments' seem irrelevant. You INCUR expenses or you don't. When you 'repay' the loan is your business (could be over many years).
Here is what I used to derive 'Qualified Expenses':
1098-T Net Tuition Expense (Box 1- Box5)
Less AOTC used on parent form (-4000) *avoids 'double dipping'
Plus Books and Supplies cost
Plus Calculated Room and Board (living at home)
==================================
Equals an amount GREATER than on the 1099-Q (Box 1)
Enter Calculated Qualified Expenses on 1099-Q line 2c column 1 & 2 (as above).
