Q. Discussions on this forum dealing with the same situation suggest that I DO NOT report the 1099-Q on my own tax return, as long as I have good records of what I spent on behalf of E’s, in case of the IRS audit.
A. Yes, that is correct.
Q. Instead, E is to report the 1099-Q on her return?
A. No. First, that is not allowed, because you are the "recipient" of the 1099-Q and the 529 distribution. 2nd, there is nothing on the 1099-Q that needs to be or can be entered on to her return.
Q. How do we offset the distribution?
A. On your own records and calculations.
Q. Will E qualify for education credit.
A. Yes. But there are some assumptions in that answer. The tuition is barely enough to cover the 529 distribution. But, I assume she has other expenses, room & board (even if she lives at home), books and a computer. If that amounts to more than $3000, she is covered. She enters the 1098-T on her return and ignores the 1099-Q because her own (and your) records say it's covered. She uses $4000 of tuition to cover the ed credit. The room and board is used by you to cover the 1099-Q. R&B is not a qualified expense for a tuition credit, but it is for a 529 distribution.
It assumes she is a half time or more undergrad, is either over age 24 or married or provides more than half her own support with earned income. Not being claimed as a dependent is not enough, she also must not meet the rules for being claimed.
