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Retirement tax questions
If your income does not allow you to take the education credit for your son, but he would otherwise qualify for the American Opportunity Credit, it is probably most beneficial for your family not to claim him.
As I said, he would still have to mark on his tax return that he is eligible to be claimed as a dependent. You would do this on the My Info screen of his tax return in the left-hand menu. Select Edit by his name and answer Yes to Someone else can claim me as a dependent on their tax return and No to And this person will claim me on their 2021 tax return.
In this case, Form 1098-T will be reported on his tax return. Form 1099-Q will be reported on your return since you are the recipient. To report Form 1099-Q on your return:
- Enter the 1099-Q in Federal > Deductions & Credits > Education > ESA and 529 qualified tuition programs. Begin by selecting yourself as the recipient and someone else not listed here as the student. You can add your son as the student.
- Make sure that a distribution code is selected only if one is on your form. Leave it blank if there is not one.
- Answer the questions on the Death or Disability, Distribution Transfer, and Refund of Education Expenses screens.
- After you return to Form 1099-Q Summary screen, hit Done. On What level of school did you attend in 2021? enter the correct one.
- You may now enter the non-dependent's student expenses.
And that's where it can get tricky. In order to maximize the American Opportunity Credit, your son needs to have paid at least $4,000 of qualified expenses out-of-pocket or with loans. That means the 1099-Q can't be used to pay for $4,000 of his tuition. It can be used towards any of the other expenses listed, but if you do not have enough expenses for the entire distribution then a portion of the remainder will be taxable income to you.
For example, say your son's tuition was $15,000 and you took out $20,000 to pay the tuition and other expenses and used it in its entirety. You would only enter $11,000 for tuition and enrollment fees and the other $5,000 in the correct category. The other $4,000 of the 1099-Q would be reported as income. The earnings portion of that would be taxable on your return.
One qualifying expense that people use is for room and board. Since your son lived at home with you, if he was a full-time student, you can still include room and board as an expense paid by the education savings account withdrawal. The expense is the amount that the school determines to be qualified room and board costs. This may reduce the amount of your withdrawal that would be taxable.
Your son would then be able to maximize the American Opportunity Credit because there was $4,000 that was not paid with the education savings account withdrawal. At that point, his tax refund should be however much federal income tax was withheld from his job plus an additional $1,000 that is the refundable portion of the American Opportunity Credit.