TurboTax new look assumes that if your expenses match your distribution, the form isn’t needed. However, it may overlook the Coordination Rule from Pub 970: you can’t use the same $4,000 of tuition f...
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TurboTax new look assumes that if your expenses match your distribution, the form isn’t needed. However, it may overlook the Coordination Rule from Pub 970: you can’t use the same $4,000 of tuition for both a tax-free Coverdell or 529 distribution and the American Opportunity Tax Credit (AOTC).
When you claim the $2,500 credit, you already have $4,000 of expenses. This can leave you with less money than you need to pay for your expenses and may result in taxable excess earnings. To resolve.
Go to Forms Mode (click the Forms icon at the top right).
In the list on the left, look for Form 1099-Q. If it isn't there, click Open Form and search for "1099-Q".
Manually enter the data from your children's 1099-Qs into these worksheets if it isn't here already.
Crucially, ensure the Recipient is marked correctly (Parent vs. Student).
Now go to the Student Information Worksheet (Student Info Wks).
Scroll down to Part VI (Education Expenses to be Used for a Credit/Deduction).
Look for the line that asks for the amount of expenses used for the American Opportunity Credit. It should show $4,000. If blank, add it.
By entering $4,000 here, the worksheet should automatically reduce the "Qualified Expenses" available to offset the 1099-Q.
Now, to report or not report the 1099 Q. Here is what you need to consider to decide if you can safely ignore the 1099-Q. To decide, run this calculation.
Step 1: Total Qualified Education Expenses (Tuition + Fees + Books + Room & Board)
Step 2: Subtract any tax-free scholarships or grants.
Step 3: Subtract $4,000 (the amount used for the AOTC).
If the remaining amount is still higher than your 1099-Q Box 1, the distribution is 100% tax-free. You do not need to report it. As an FYI, Room and board is a "qualified expense" for 1099-Q distributions, but it is NOT a qualified expense for the AOTC. This is what usually makes it possible to cover the distribution, even after taking the education credit.