I am perceiving a possible error in how TurboTax is calculating the "Adjusted Qualified Higher Education Expenses applied" value on lines 2g and 2h in Part VIII of the Student Info Worksheet for my dependent child's tax return.
In 2020, the college reported on the 1098-T $12,559 in total receipts for my child of which $4,950 was scholarships on the 1098-T. That results in $7,609 remaining which was paid directly to the university from the child's 529 QTP savings plan.
According to the 1099-Q for the 529 QTP plan, $17,718 was distributed from the plan (with $3,727 being earnings). Of that $17,718 in distributions, $7,609 was used to pay the aforementioned tuition, and the remainder ($10,109) was used to pay room and board and other expenses.
The child is not eligible for any Education tax credits since the child is in graduate school and we did not attempt to claim them on either my return or the child's return.
TurboTax, however, only considers the $10,109 to be part of the adjusted qualified higher education expenses on lines 2g and 2h of Part VIII of the student worksheet. The $7609 paid in tuition is not considered there. I can see on line 17 of Part VI of the worksheet that the $7609 paid in tuition is "used for credit" or deduction. Why is that the case when we are not attempting to claim the credit.
It does not seem right that the child should have to pay taxes on part of the $3727 in earnings from the 529 proceeds when all the proceeds from the 529 were used to pay either tuition or room and board, both of which are qualified education expenses.
Can someone explain to me what is going on?
