Hi folks,
I had a rather complex question and was hoping someone could help me out. Back in early January 2021, I made a withdrawal of $53,049 from a Vanguard 529 account that my parents had set up with me as the beneficiary. The purpose of this $53K withdrawal was to bolster the down payment on my first house. So when 2022, rolled around, I received a 1099Q from Vanguard stating that had indeed withdrawn $53K, of that amount, 37.5K was earnings and 15.5K was basis.
I did some research and clearly this is a non-qualified 529 withdrawal, so I should expect to pay a 10% penalty, on top of the regular tax on the earnings portion. But here's the catch, I went to a US military academy, where tuition is paid for and you also get a 4 year college degree. Per Section 2005(d) of Title 10 of US Code, it appears that my 10% penalty gets waived (https://www.law.cornell.edu/uscode/text/10/2005). This penalty exemption is further reinforced by IR publication 970, page 48 of the pdf (https://www.irs.gov/pub/irs-pdf/p970.pdf)
The issue right now appears to be with Turbo Tax's software. When I enter my 1099Q numbers in the appropriate section, Turbo Tax tries to auto-calculate how much I owe to the IRS and my home state. These numbers get displayed near the top of the screen. Right now Turbo Tax says I owe just north of $12K in federal taxes and $3K in state taxes. I'm 99% sure though that Turbo Tax is not giving me the 10% penalty exemption, or at the very least they are not explaining how the back-end of the turbo tax software arrives at those 12K and 3K numbers.
I should only be paying taxes on the 37.5K earnings. I did some back of the napkin math and I fall in the 24% tax bracket (my regular income plus $53K for 2021). 24% x $37.5=$9000. So I don't know why Turbo Tax is saying I owe 12K in federal taxes. If I could manually change this number from 12K to 9K I wouldn't have this problem, but I can't figure out a way to force the numbers.
Any help would be appreciated! And if someone thinks they have an idea of how to remedy but needs more info, then I can send screenshots or pictures on request.
Very Respectfully,
Holden
