Q. After entering that, the tax bill jumped by like $2K. Didn't know my taxable income like will affect her return also?
A. The taxable portion of the 529 distribution (1099-Q) is unearned income. As such, it is subject to the "kiddie tax", were a portion of the student's income is taxed at the parent's highest tax rate.
Q. Wouldn't these all fall under Qualified Education Expenses? If so, why does my daughter need to pay so much tax on them still?
A. Your problem is you don't have enough qualified expenses to keep both the scholarship tax free and the 1099-Q untaxable. If some of it does end up taxable, you would actually want to declare some of the scholarship taxable before making the 1099-Q taxable (taxable scholarship is considered earned income; it's complicated)
But, since you actually paid for spring 2022, in 2021, you may count that money for 2021 taxes, even though it doesn't show in box 1 of the 1098-T. You claim the tuition credit, or report scholarship income or pay tax on 529 distributions , based on your own financial records, not the 1098-T. In the 1098-T screen, there is a link "What if this is not what I paid the school" underneath box 1. You would then be able to enter the actual amounts paid.
BUT
Here's your bottom line: Don't enter either the 1098-T or1099-Q on either your return or the student's. The interview is just too tricky. Counting the 2022 expenses, for 2021 means you had enough expenses for both scholarship and 1099-Q to be tax free.
Expenses: Payment Sources:
$28791 2021Tuition $43,009 two 1099-Qs
23791 2022 Tuition 10,300 2021 Scholarship
6900 2021 R&B 10,300 2022 Scholarship
6900 2022 R &B $71,609
$71,382
You can surely come up with $227 of book expenses. Even if you can't, that's not enough taxable income for her to file a return (the taxable amount is actually something less than $227).
For 2022, remember that you already used those numbers for 2021, so adjust your 529 plan withdrawal, accordingly.
