"$2100 from scholarship sponsor was forwarded to the student. This amount was promptly sent to the 529 Plan".
What does that mean? Was the $2100 treated as rollover/return of distribution? Was the 1099-Q adjusted for that? Or did the plan just treat it as a contribution? The following ignores that issue:
Q. When using Turbo Tax Deluxe how is the Form 1099Q and 1098T information entered in the program, and on which return? I am a grandparent account owner and the beneficiary grandson will be considered a dependent of my daughter.
A. Do not enter the 1099-Q on your (or anyone else's) tax return. 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*. $5500 (box 1 1099-Q) is probably a reasonable amount for a full year of room & board (check a local college published rates for justification).
On the parent's return, they enter the 1098-T to claim the American Opportunity Credit (AOC). For simplicity they should enter it with $4000 in box 1 and box 5 blank.
$5200 tuition + $300 books, etc. = $5500 qualified expenses minus $4000 used for the AOC leaves only $1500 to be allocated to the scholarship. So the student has $600 of taxable scholarship. If he has no other income, that is not enough to pay any tax. In fact, we should probably call the whole $2100 taxable, so we can allocate the $1500 to the 1099-Q (reducing the amount for room and board to $4000). For simplicity, he enters the 1098-T on his return with 0 in box 1 and $2100 in box 5. If that is his only income, he is not required to file a tax return. You may want to anyway, to document the declaring of the scholarship as taxable.
*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!
References:
- 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."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
