Hal_Al
Level 15

Education

Your qualified educational expenses (QEE) are $46,763 + 12,000 + 1889 = 60,652 .

60, 652 -22,000 scholarship = 38,652 Adjusted QEE

Your total 529 Plan distributions are $11,000 +12,889 + 23,044 = 46,933

 

$46,933 - 38,652 = $8281 shortfall in QEE

Assign that to the 1099-Q with the lowest percentage earnings. 8281/12,889 = 64.24% of earnings are taxable. 0.6424 x 5021 = $3225 Reportable earnings income 

 

The alternative is to have the student report $8281 of his scholarship as taxable income, freeing up all the expenses for the 1099-Qs.  Why is reporting $8281 income better than reporting $3225?? It's not just because it's gong on the  student's return, instead of the higher tax rate parent's. We had that option already (but with $4938 taxable earnings rather than 3225). 

 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (EIC. IRA contributions).  So, $8281 + $2000 DoorDash income is $10,281 and that's less than $12,950, so he will have no taxable income.  The $2000 probably has to be reported as self employment income, so he does need to file.  You want him to file, anyway, to document the reporting of the taxable scholarship. 

 

So, how do you enter all this in TurboTax.  Quite easily. First and foremost, do not enter any 1099-Qs, on either your return or the student's. As explained in the earlier posts, they are not required* and entering them gets messy.

 

On the student's return, enter a 1098-T with box 1 blank and $8281 in box 5**. Enter no other numbers. Be sure the $8281 shows up on line 8r of Schedule 1, on his tax forms

 

*Reference: 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." 

 

**The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  Just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

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