Hal_Al
Level 15

Education

It's not that simple. 

If you follow the TurboTax (TT)  interview and answer all the questions, and make all the entries,  it will do all that for you (theoretically). 

 

BUT, the TT interview is designed to (try) to handle all scenarios. Including some unexpected ones. So, it's best if you have some idea of the expected outcome. 

 

I will  give you a short cut that will do what you think you want (see below the line).  But you actually want more.  In the overall tax accounting, the 529 withdrawal does not actually duplicate the (tax free) scholarship expenses.  You do not have to pay tax on all that distribution earnings. This is because room & board (even if you live at home) is a qualified expense for a 529 distribution but not  a qualified expense for tax free scholarship. You also want to claim the tuition credit, if you are eligible (income not too high).

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529 Scholarship Exception  workaround in TurboTax:

Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  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. Also enter the amount of the scholarship in the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship 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.