529 Plan Daughter (dependent) filing her own return, 1099-Q distributions match 1098-T qualified expenses, but TT still computes tax liability?

mcelmell1 · ‎April 5, 2023

I have searched high and low for an answer, including testing various scenarios on TurboTax, but still confounded. Here's the situation...

My daughter is in college, out of state. She is the beneficiary of a 529 Plan. I (the parent) am the owner of the 529. I have already used TT (Premiere) to file our taxes, but my daughter still needs to file her tax return (she has excess of $13k in W-2 income), and will be using the Online version of TT to do so. My daughter received a form 1099-Q (for Tax Year 2022) which correctly details the amount of distributions from the 529 Plan and paid directly her school. She also has a form 1098-T, which details the amount of Qualified Tuition and Related Expenses.

Before my daughter files, I am using TT Premiere to "practice" by entering the numbers from the 1099-Q and the 1098-T forms. The two values (gross distribution reported on 1099-Q and qualified education expenses reported on 1098-T) differ by an amount that accounts for the Room and Board expenses plus a little bit more. After plugging in the Room and Board expenses into TT, it shows that my daughter still owes taxes toward the Federal return, but she should receive a refund for her State (California) return. We are happy about the refund for the state return, but no so for the Federal return.

In other posts here, on similar topics, I have read that sometimes TT makes errors on this calculation. Also, I have read that it may not be necessary to report the 1099-Q when filing. This worries me a bit, since it seems to be a red flag if the information on the 1099-Q is reported to the IRS. Can anybody in the community speak to that?

Here are the particulars of my situation...

Regarding forms 1099-Q and 1098-T

Are you the student or parent. Student. 1099-Q shows my daughter's name and SS#
Is the student the parent's dependent. Parent's dependent.
Box 1 of the 1098-T $20,677.71
box 5 of the 1098-T (Blank - no scholarships or grants)
Any other scholarships not shown in box 5 No
Does box 5 include any of the 529/ESA plan payments (it should not) No
Is any of the Scholarship restricted; i.e. it must be used for tuition N/A
Box 1 of the 1099-Q $26,083.03
Box 2 of the 1099-Q $19,494.10
Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? Student
Room & board paid. If student lives off campus, what is school's R&B charge. $5329.00
Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers None.
How much taxable income does the student have, from what sources $13,279, from two W-2's (one job in California, one job in Colorado)
Are you trying to claim the tuition credit (are you eligible)? No.
Is the student an undergrad or grad student? Undergrad (full time)

Note: After combining the QTP expenses (Box 1 of 1098-T, $20,677.71) with Room & Board expenses ($5329.00), the total is $26,006.71. This is less than the amount shown in Box 1 of 1099-Q ($26,083.03), the difference being $56.32. Interestingly, when I checked my daughter's university account via the school's Financial Services website, she shows a credit of $56.32...the exact same amount. Not sure why the credit exists there, instead of the 1098-T, but it seems to point to sound accounting at the university, down to the penny!

According to my "practice" attempt on TT Premiere...

With the 1099-Q and 1098-T information entered, my daughter owes $575 (federal), and should receive a refund of $199 (state, California).
If we don't enter 1099-Q or 1098-T, my daughter should receive a refund of $190 (federal), and $81 (state).
So, it appears that for federal, TT is computing ($575 + $190 😃 $765 taxes owed if she reports the 529 Plan distributions and QTP expenses (which seem to match). This is not the result we are hoping for from a 529 Plan. The plan should not increase her taxes as long as the distributions match the qualified expenses.
For state, TT is computing $199 refund if we report the distributions and expenses, but only $81 refund if we don't. The difference is ($199 - $81 😃 $118...she would lose this amount if she did not report the 1099-Q and the 1098-T + Room & Board. Again, this does not make sense.

So, a few questions...

Q1: Is it okay for my daughter to simply NOT report the 1099-Q and the 1098-T?

Q2: If so, does this pose a risk or raise a red flag with the IRS?

Q3: Is this likely an error with TurboTax? Or, am I at fault by missing something in my data entry?

By the way, neither of us (myself or daughter) are taking the AOTC (American Opportunity Tax Credit).

Thanks in advance for any advice.