Q. Can I (parent) show both 1099-Q and 1098-T, without claiming my daughter as dependent?
A. Yes. But you don't need the 1098-T. See below.
Q. Can my daughter can show both 1099-Q and 1098-T?
A. No. You are the recipient of the 1099-Q. She cannot enter it. She can use the 1098-T.
Q. Can she claim the educational Tax credit?
A. Yes, Can and should, because you can't (she isn't your dependent). If you had previously claimed the American Opportunity Credit (AOC) the maximum 4 times, she can claim the lesser Lifetime Learning Credit (LLC).
She and he husband will only use a max of $4000 of tuition to claim the maximum AOC, but will need $10,000 to get the max LLC. You may use the rest of the tuition, books, a computer (if she bought one) and room and board (even if she lived at home) to claim the 1099-Q as tax free. If those available expenses exceed box 1 of your 1099-Q, you do not even need to enter it.
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. You also cannot count expenses that were paid by tax free scholarships.
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."
If you do need to enter it, in TurboTax(TT), to get it to calculate the taxable amount, it is actually easier in your situation (the student is not you dependent).
Enter the 1099-Q. When asked who the student is answer: someone else not listed here. Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter all the expenses. Also enter the amount of tuition used by the student, for the credit, in the box "Tax-free assistance". This reports some of the earnings as taxable and claims the scholarship/tuition credit penalty exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.
