Q. Can someone please explain why the beneficiary/recipient/student is being taxed when the tuition offsets the distribution.
A. The interview is just complicated and it's easy to enter somethin wrong. Just delete the 1099-Q and the 1098-T. In particular, TurboTax assumes that some of the tuition is allocated to the tuition credit. You must override that number.
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 don't need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit.
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”.
You mention that there are no scholarships. Are the parents eligible for the tuition credit (is you income under $180K)? If so, you should be claiming that, even though the 529 distribution covered all the tuition. Room and board, books and a computer are also qualified expenses for a 529 distribution.
