Q. Would you please explain what you mean by "increase her income by $4,000?" -- how you get this number?
A. You, the parent, need $4000 of tuition (or other qualified expenses) to claim the max. AOC. Right now all $19,000 of her tuition is allocated to tax free scholarship. So, if we allocate $4000 of $19,000 tuition to the AOC. But that means there's only $15,000 of tuition for tax free scholarship. So, $4000 more scholarship becomes taxable.
Q. how I do this on TT?
A. Theoretically, TT can do all that. But it' s too easy to make mistakes. So, you manually calculate your entries. For you, it's enter a 1098-T with $4000 in box 1 and 0 in box 5. For her, 0 in box 1 and $31K on box 5 (27K that was already taxable + the additional 4000).
Q. So reporting a number different from the original 1098-T is acceptable?
A. Yes, what you enter is only used on the worksheets. The entered "bogus" 1098-T is not sent to the IRS.
Q. I'm quite surprised that this could be done legally?
A. Me too, the first time I heard it, 15+ years ago, in this forum. Now, it's written up in the IRS publications.
Q. Just to confirm -- $2,200 from 529 was too small to report (easily cover the housing cost), so I don't need to report it on my return, right?
A. Right? Again, theoretically TT will come to that conclusion (if you do enter it) and enter nothing on the actual tax forms. But this forum id full of frustrated users who could not get that to happen. Just don't enter it.*
Q. I may not have all the receipts for her books and lab equipment. Is it ok to estimate?
A. Yes, unless you get audited (unlikely).
*The 1099-Q is only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can.
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.
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."
