529 distributions are supposed to be tax free, so why did my refund just drop by $2000 after entering the information from my 1099-Q?

[KrisD15]

Your question is difficult to answer because you mention Room and Board. 

Room and Board should not be included in Box 1 on the 1098-T. 

Another issue is whether there is an amount in Box 5 on the 1098-T.

The distribution reported on the 1099-Q can be ignored it it was used for "Other Education Expenses" but if the student received any scholarships which was used to pay room and board, that amount would be taxable to the student.  

ADDITIONALLY, if the TurboTax generated a credit on the excess Tuition, deleting the 1099-Q but not the 1098-T could cause the TurboTax program to generate more credit than you are eligible for since it will no longer have the 1099-Q data.  

The link below explains in detail how the 1099-Q and 1098-T work together. 

The numbers in Box 1 and Box 5 on the 1098-T would be helpful for us to know. 

IRS Pub 970

[archi-dad]

Thanks for continuing to try to help. As I've explained in an earlier reply, the school did include $1,751 for room and board in the 1098-T box 1 amount of $16,595.93. I've seen Publication 970, and page 48 does discuss times when r&b are to be included. Perhaps the school did so because, as a freshman, my daughter is required by the school to reside in on-campus housing? Boxes 2, 4, 5, 6, and 10 all say $0. Box 3 is empty. Boxes 7 and 8 are checked.

Here's a summary again: we incurred $16,596 in expenses reported on the 1098-T (tuition and r&b), another $964 in required books and supplies, and $787 for a required laptop, for a total of $18,347. The distribution from the 529 account (confirmed by the 1099-Q) was $17,915.

Thanks again for the review and advice.

[MarilynG1]

@archi-dad  For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return, as long as Qualified Education Expenses exceed the distribution. 

Click this link for more info on Form 1099-Q.

Check your worksheet Education Expenses and Fees Summary (screenshot).  Use FORMS mode in TurboTax Desktop, or Print/View/Save from Print Center in TurboTax Online. 

[archi-dad]

Thanks for the input. A thought for you - that screenshot should probably black out the ssn.

[TStaeger]

I have a similar issue.  I've noticed that the 1099-Q form seems to truncate the first digit on the education expenses carried over from form 1098-T entry.  For example, 1x,xxx comes into the form where the taxable portion of gains are determined as x,xxx without the 1.  Out of curiosity, I made up a number, like 1y,yyy and the numbers comes over as y,yyy.  I tried deleting both forms and re-entering in different orders and went through the interview each time, but the same problem occurs and it shows that a portion is taxable even though my 1098-T amount exceeds my 1099-Q distributions.  I doubt it's a program error (and more likely a user error) but I thought I would post this just in case.  

[JillS56]

Even though your 1098-T is in excess of the 1099-Q it is possible that you may not be entitled to any deduction for education credit.   The correct way to make the determination if you are entitled to an education credit would be:

1. Take the amount of your 1099-Q and your 1098-T.
2.  Subtract the 1099-Q from Box the amount in Box 5 of the 1098-T.  You have to deduct the amount of scholarships/grants received from the amount of your 1099-Q.
3. Take the amount of Box 1 of the 1098-T and subtract Box 5  of the 1098-T.   The remaining positive balance is eligible for calculating your education credit.
4. Now subtract the balance of the 1099-Q in paragraph 2 above from the amount of the 1098-T in paragraph 3 above.   
5. If the amount from paragraph 4 is positive, then this amount can be used towards the education credit.   If the amount from paragraph 4 is a negative number then that amount needs to be reported as income.    If the tuition is less than what you took from the 529 Plan and the Scholarships received, this amount must be reported as income.  

In summary, when the amount taken from your 529 and reported on 1099-Q and the amount in Box 1 of the 1098-T less the amount in  Box 5 of 1098-T then the difference of these numbers is TAXABLE.

[kokopeli]

Per savingforcollege.com, room and board for students is a qualified distribution.  These answers don't consider any of that.  Seems to me if all distributions were used for qualified expenses that I can skip entering any of this information.

[AmyC]

Correct, if all of the 1099-Q went towards qualified education expenses, including room and board, then the 1099-Q does not need to be entered. Per Publication 970, Tax Benefits for Education. 

This leaves a matter of qualifying for the AOTC with the changes in eligibility and manipulating the numbers if possible. The phaseout for  AOTC is:

• $80,000-$90,000 or
• $160,000- $180,000 MFJ

Please see my 529 example with IRS information here for help achieving AOTC with a 529.

@kokopeli

[aliasrb]

This is very stupid of TurboTax.  Not to enter a form one gets because it can't do the math and logic correct.  Turbotax should allow to enter the info and then go through the rules of what a 529 allow expense are.  If the expenses are equal to or more, then no tax!  Very lazy programming.  You are making your customers game the program to pay the correct amount of taxes. 

[ND79]

Do I understand this correctly:  If I enter the tuition amount I paid and was reported on Form 1098 T, and I receive Form 1099 Q for the distribution I took to pay that tuition, I should NOT enter any of

Form 1099Q into Turbo Tax?  (Because when I did enter 1099Q, my refund decreased.)

[DawnC]

Yes, if the 1099-Q covered qualified educational expenses, it does not need to be reported.  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.    You can't take an education credit for expenses covered by your 529 distribution.  

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.  @ND79  

[RAD9]

My son was beneficiary or CA Scholarshare 529 plan. He received so much in scholarships and grants there was over $40,000 left when he graduated. I left the money in the plan in case he wanted to go on to get a Master's degree. He obtained very good employment & doesn't intend to get a graduate degree in the near future. Three years after he graduated and is no longer a dependent we needed to use the funds to make extensive emergency repairs to our house. How can we apply the scholarship and grant money now to reduce or eliminate the penalty for not using the funds while he was in school three years later?

[RAD9]

My son was beneficiary of CA Scholarshare 529 plan. He received so much money in grants & scholarships that over $40,000 was left. Could have withdrawn while he was in college but I left the $ in the plan in case he went on for a graduate degree. Now, 3 yrs. later he has a great job & doesn't need. We needed it for emergency and withdrew the money last year. Is there any way we can get credit for the scholarships & grants now to avoid the penalty for not using the $ for education ?