Q. Paid student loan, reimbursed w 529 $, what do I report?
A. Nothing.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including student loan payments, to cover the distribution. 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.
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”.
Q. Is the loan deductible or it's not since it was reimbursed by 529 money?
A. Simple answer: no. But, you actually have a choice. You could take the interest deduction, but then some of the distribution is taxable. To keep it simple, don't take the interest deduction. It usually doesn't make much difference.
