Q. How do I include enough costs on my return to justify the 529 withdrawals, without also including the full amount of the scholarship, which is what happens if I include the 1098-T?
A. You don't include enough costs on your return to justify both 529 withdrawals. The 2nd distribution went to her. If it needs to go anywhere, the 2nd 1099-Q goes on her return.
Q. How do I include enough costs on my return to justify my $27,770 529 withdrawal?
A. You have to tell TurboTax (TT) that the Scholarship will not be allocated to tuition, for tax purposes. That takes a workaround. There are several. The simple way is leave box 5 blank when you enter the 1098-T, on your return.
Simpler yet, just don't enter the 1099-Q (or 1098-T). You are allocating enough expenses to the 1099-Q that none of the distribution/withdrawal is taxable.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient allocated 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). !
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”.
- ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form."
____________________________________________________________________________________________
For your daughter's return, again do not enter her 1099-Q. It is fully covered by expenses. She enters her 1098-T exactly as received. Enter no other numbers (they were used on your return). When asked if any of the scholarship was used for room and board, answer yes. Then enter the amount you want to be taxable ($13,785), in the pop up box. R&B are not "qualified educational expenses". So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. This will put the taxable scholarship on line 8r of Schedule 1. Since that plus her interest is less than $14,600, she will pay no tax.
