Q. Is there anything we can do to minimize his taxes owed?
A. Yes. The Good news:
1. He does not need to pay the penalty on the full distribution. The scholarship exception still partially applies, despite all that messy detail
2. You CAN claim the tuition credit. He will just have to pay a little more tax on the scholarship (declare more of his scholarship as taxable; $26,000 rather than $22,000).
3. Not all of the 529 distribution will be taxable because room & board are qualified expenses only for the 529 distribution. It doesn't matter that scholarships actually paid for r&b. R&B can be allocated to the 1099-Q, because the scholarship is already taxable income.
4. The underpayment penalty (failure to pay estimates) doesn't apply if last year's taxes were low or zero.
5. less than half the income will be subject to the "kiddie tax" (kid pays at tax at parent's rate), depending on how much other income student has.
Provide the following info for more specific help:
- Are you the student or parent.
- Is the student the parent's dependent.
- Box 1 of the 1098-T
- box 5 of the 1098-T
- Any other scholarships not shown in box 5
- Does box 5 include any of the 529/ESA plan payments (it should not)
- Is any of the Scholarship restricted; i.e. it must be used for tuition
- Box 1 of the 1099-Q
- Box 2 of the 1099-Q
- Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
- Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
- Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
- How much taxable income does the student have, from what sources
- Are you trying to claim the tuition credit (are you eligible)?
- Is the student an undergrad or grad student?
- Is the student a degree candidate attending school half time or more?
