Education
It depends. It sounds as if you did not claim your daughter on your return, and the distribution was sent directly to the school to pay for tuition, so the Form 1099-Q came to her. This means it is all on her return, so well done planning that part. If she is not claiming an Education Credit, then there is no reason to reserve some of the qualified expenses for a credit and they can all be applied to the distribution.
Q1: Is it okay for my daughter to simply NOT report the 1099-Q and the 1098-T?
There are two schools of thought in reporting Forms 1099-Q and 1098-T if there is not tax liability because the qualified education expenses covered all of the distributions and scholarships.
Some prefer to always file forms.
Some are fine holding the forms and if the IRS asks to see them, you can send them in then. If there is not a tax liability, then there would be no fines.
I think it comes down to how you and your daughter feel most comfortable. If the IRS did flag it, they might research her return before any refund, and send a letter requesting information. If they don't receive the information within the timeframe stated in the letter, then they make an adjustment based on their existing information.
IRS Publication 970 says on pages 50 and 51:
Expenses for room and board must be incurred by students who are enrolled at least half-time (defined later). The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the school. You may need to contact the eligible educational institution for qualified room and board costs.
Q2: If so, does this pose a risk or raise a red flag with the IRS?
If you don't include the forms she might never hear from the IRS and if she does, as long as you are confident the qualified education expenses cover the distribution, it would be a matter of replying to their letter requesting information. It would not cause liability, so there would be no penalties or interest.
Q3: Is this likely an error with TurboTax? Or, am I at fault by missing something in my data entry?
This is tricky section and it may just be that income and forms were entered in a different order and the room and board were not given as an option.
It is important to enter all the income, then the Form 1099-Q, and then the Expenses and Scholarships ( Form 1099-T section.
If it is entered out of order, the system may be reserving $10,000 of educational expenses toward an education credit, either American Opportunity Credit or Lifetime Learning Credit.
If room and board were paid from the 529 distribution, please go back through the Education Credit section and be sure those were entered. That is not a qualifying expense for the Education credits but can be used with 529 funds (subject to limitations).
It may be that entering the information in this order will resolve the disparity between distribution and expenses.
If it does not, please do let us know what changes and what did not, and we are happy to research further.
