Q. If a person is not eligible for federal income tax credits, can you just omit entering the information on the 1098-T in TurboTax (TT) and your tax return for both the parents and kids?
A. Yes. The 1098-T is only an informational document.
Q. For example, $17,000 gross distribution (Box 1), $2,000 earnings (Box 2) and $15,000 basis (Box 3). Let's say $1,000 above cost of attendance so 50% of the earnings are taxable and 50% tax-free earnings.
A. It doesn't work that way. If $1000 of the distribution is non qualified, the math goes like this:
$1000/ 17,000 = 5.88% of the distribution is non qualified. 0.0588 x $2000 earnings = $118 taxable income (and subject to the 10% penalty).
Q. How to enter that in TT?
A. Theoretically, you enter the 1099-Q in the 1099-Q section and the 1098-T in the Educational expenses section and TT figures it out. That seldom works. Here's the short cut:
Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there. . You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to apply the penalty.
