@Amy Badlands
Q. The entire 2020 1099Q distribution amount was for his university tuition or college qualified expense. We did not withdraw any excess amount over his qualified college expense. My question is why I need to pay tax on his 529 distribution? I thought 529 distribution on college expense is tax free.
A. Yes, if the distribution was totally covered by expenses, none of it is taxable; as long as you didn't use some of those expenses to claim some other tax benefit.
So, since it's not taxable, just don't enter the 1099-Q. The 1099-Q is just an informational document, the numbers are not required to be entered on your tax return. In fact, when the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
So, you might ask: why doesn't TurboTax figure that out?
There are three things you can do with your Qualified educational expenses (QEE):
- Allocate then to scholarships (so that the scholarship remains tax free)
- Use them to claim an education credit
- Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable
TurboTax allocates QEE, in that order, until you tell it otherwise.
One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. You may reach that screen sooner.
Another possibility is that you had scholarships that TurboTax allocated some of the expenses to.
