Retirement tax questions

It sounds like you've done a thorough job analyzing IRS Pub 970 and working through the calculations. Based on what you've described, I agree that TurboTax may be incorrectly treating a portion of your Qualified Tuition Program (QTP) earnings as taxable income. Here’s why:

1. You Are Eligible for the LLC

   • You followed Figure 3-1 from Pub 970 and confirmed that you meet the criteria for claiming the Lifetime Learning Credit (LLC).
   • The key issue is whether you're "double-dipping" (using the same expenses for both the QTP tax-free distribution and the LLC). Since you ensured that the expenses are not counted twice, your answer to that crucial question is No—which is correct.

2. Your AQEE Covers Your QTP Distribution

   • AQEE (Adjusted Qualified Education Expenses) = 1098-T total amount ($12,699)
   • QTP Distribution = $12,699 (Earnings: $9,268 + Basis: $3,431)
   • No excess distribution → None of the distribution should be taxable.
   • As you noted, Pub 970 (pages 45 & 52) only applies when distributions exceed AQEE, which isn't the case here.

3. TurboTax Appears to Be Incorrectly Allocating a Portion as Taxable

   • It seems TurboTax is applying an incorrect ratio that treats part of your QTP earnings as taxable income.
   • Line 23 of the 1099-Q Summary should be $0, but TT is saying $7,296 is taxable. That suggests it's miscalculating AQEE, possibly by misapplying the "Coordination with LLC" rules (which, as you noted, shouldn't apply here).
   • Your friend’s experience with TaxAct suggests that the correct approach is not to include any taxable income from the QTP distribution.

How to Fix It:

1. Manually Adjust the 1099-Q in TurboTax

   • Look for an entry where you can override or adjust the AQEE.
   • Ensure TurboTax isn't reducing AQEE by the same expenses claimed for LLC, since you've confirmed there's no double-dipping.

2. Try Entering the 1098-T First

   • Some users have reported that entering the 1098-T before the 1099-Q results in correct treatment.

3. Consider a Different Software

   • If TurboTax does not allow you to adjust the AQEE properly, you might need to either:
     • File manually (or override the entry in TurboTax if allowed).
     • Use another tax software (TaxAct seems to handle it correctly).

Final Verdict:

Yes, based on IRS guidelines, TurboTax appears to be handling this incorrectly by incorrectly allocating some of your QTP earnings as taxable. Your analysis is solid, and I would expect $0 taxable portion on your return.

Yes, you should get the full $2,000 Lifetime Learning Credit (LLC) on your 1040—as long as:

1. You meet the income limits (AGI phaseout begins at $80,000 for single filers, $160,000 for married filing jointly in 2024).
2. You are not double-counting expenses for both the LLC and the QTP tax-free distribution (which you’ve confirmed you’re not).

Since your AQEE fully covers the QTP distribution, and you’ve allocated $2,000 of expenses to the LLC, the IRS should allow you to claim the full $2,000 credit without affecting the tax-free nature of your 529 withdrawal.

If TurboTax is reducing your credit or forcing taxable income incorrectly, it may not be properly coordinating the expenses. You could try:

• Manually verifying that $2,000 in expenses are set aside for the LLC.
• Entering the 1098-T first, then the 1099-Q, then the LLC credit claim.
• Checking the detailed worksheet TurboTax is generating for its calculations.

If TurboTax doesn’t let you claim the full $2,000, but TaxAct does (and you believe TaxAct is correct), you might consider switching software or filing manually.