Yes, if your child’s educational expenses are equal to or exceed the 1099-Q distribution, the earnings are not taxable. The 1099-Q should be reported on the tax return of the person whose SSN is on the form (your tax return) and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.
To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the amount that was refunded. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it. If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your tax return as ordinary income and you will pay an additional 10% penalty tax as well on that amount. TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.
Your child can report the 1098-T on her tax return and she may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, they cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.
Please see the TurboTax article What Are Education Tax Credits? for additional information.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
