Q.How can the parent's return do the proper calculation for taxable 1099-Q income if you don't enter the 1099-Q on the parent's return along with the 1098-T for the education credit?
A. The parent's return doesn't necessarily do the calculation. The recipient's return does.
Q. Don't you need the 1098-T and the 1099-Q on the same return for TT to determine taxable income?
A. Yes and that is the recipient's return.
Q. Which then gets reported on the dependent student's return, right?
A. No. It will be the recipient's return and that could be either the parent or the student.
Q. Not all of the 1099-Q would be taxable if there were 1098-T expenses so I'm not even sure what good it does to report the 1099-Q on the student's return.
A. You enter it to do the complicated calculation to determine the taxable amount
Q. Why wouldn't you just report the net taxable income on the student's return?
A. You could manually calculate the taxable amount and enter it, but then you have to deal with the penalty (or penalty exception) that TT handles as part of that.
Q. This is very confusing and big tax circle.
A. Yes, But it can be avoided by carefully limiting your withdrawal (distribution) to NET expenses (after scholarships and the education credit).
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. 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”.
