1099-Q

[jpasmith]

I have 2 children in college and each has a 529 plan.  I got two 1099-Q forms about the funds I took from those accounts to pay for qualified expenses.  But when I entered them into TurboTax, my refund went down $7000.  Those were qualified expenses and shouldn't have been taxed, but obviously TurboTax thinks they should be.  Any advice about how to fix this?  

[DawnC · Accepted solution]

If you know that the distributions from the 529 plan are not taxable because they were used on qualified expenses, do not enter the 1099-Q forms.  For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. 

However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.    Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. 

For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.