Q. Do you know why Turbo Tax automatically taxed me on the earnings portion of the 1099-Q?
A. You did not enter the offsetting expenses correctly and/or the educational info.
Confirming AmyC's reply: just don't enter the 1099-Q (or the 1098-T).
The 1099-Q (and the 1098-T) 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. But, it will prepare a 1099-Q worksheet for your records (you don’t need it). 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."
Q. Does it make a difference if I am not able to get tuition credit that was sent on Form 1098-T because my income is more that $180K.
A. Technically, No. But that reinforces the likelihood that none of the 529 distribution is taxable, since none of the expenses will be needed for the tax credit.
