1099-Q

[tammy1224]

My daughters attend U of A in Tucson, AZ. They each received a $10,000 scholarship towards out of state tuition. In addition to the $10,000 scholarship, the amount withdrawn from each 529 was $23,659. All of that distribution was used for education expenses. Why did my federal return decrease after entering my 1099-Q. The earnings reported equal $5828. I am not sure why I would be taxed

[SharonD007 · Accepted solution]

Form 1099-Q only needs to be reported on the tax return of the person whose SSN is on the form if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income.

First, determine if the Form 1099-Q needs to be reported on the tax return by comparing the withdrawal with the tuition paid on the 1098-T added to other qualified educational expenses. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement. Please review the TurboTax articles Guide to IRS Form 1099-Q: Payments from Qualified Education Programs and What is IRS Form 1099-Q? for further details.

Secondly, enter the 1099-Q if the withdrawal exceeds the educational expenses by following the directions in the TurboTax Help article Where do I enter a 1099-Q?

[tammy1224]

Great! Thank you so much. I still report the 1098-T, correct? The total on line 1 0f the 1098-T is approximately $2000 less than the 529 distribution. However, the amount on line 1 of the 1098-t plus other qualified expenses does out weigh the 529 distribution. So, report the 1098-T but not the 1099-Q? 

[KrisD15 · Accepted solution]

The Education section can be confusing because you have options to how you want to allocate expenses, scholarships and distributions. 

TurboTax will take the option that results in the best tax break for this return. Since school usually covers 5 calendar years, and the student might need to claim income, the option may or not be the best. 

TurboTax will claim the distribution if that means more expenses are freed-up for the education credit if the credit is more than the tax.

You don't say if the 1099-Q was issued to you or the student. Always best to have the student (beneficiary) make the withdrawal. If the distribution ends up taxable, it will be taxed at the student's rate with is usually lower that the parents. Making a direct transfer to the school results in the 1099-Q being issued to the student.

With all that said, if you add all the expenses, and that amount is equal to the distributions and scholarships,  you needn't enter either Form 1098-T nor Form 1099-Q.

(These form are used to make calculations, they are not entered to be matched by the IRS)

If there is excess scholarship, or distribution that someone must claim, you can enter the forms and let TurboTax do the math. 

If you think a credit would be worth more than the tax, you can again enter the forms and let the program do the calculations. 

If you decide to enter all the forms, make sure you have your income already entered (so a credit can possibly go against your tax liability) and make sure you complete the ENTIRE education interview. You know your done when you get to the "Maximize my tax break" screen. 

[tammy1224 · Accepted solution]

Interesting! Makes sense. My name is on the 1099-Q and I pulled the distribution to my checking and from there paid the university. Good to know as I have two boys yet to attend college. Turbo Tax did say I qualified for the American College Credit (is what i think it is called). Turbo tax did suggest that reflected the greatest deduction but I did not add other qualified expenses. I know that College Credit is only allowed once per person and am not sure when is the best time to use it. We already expended the entire 529 as it was only approximately $24,000