Q. Our oldest son receives a scholarship for tuition as a dependent of a university employee. Is this scholarship taxable?
A. No. Scholarships that pay for qualified expenses (e.g. tuition) are tax free. if the "scholarship" is technically Tuition remission and/or tuition waivers, they are also tax free.
Q. Also, he receives a 1099Q distribution to pay his off campus apartment and food...is this distribution claimed on our tax return as he is our dependent? Or his return?
A. His dependent status is irrelevant.
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. The 1099-Q gets reported on the recipient's return, if it even gets reported. The recipient's name & SS# will be on the 1099-Q.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
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."
I'll post a separate reply for the questions for the younger son.
