No. You can just not report the 1099-Q, at all, if your
student-beneficiary has sufficient educational expenses, including room &
board (even if he lives at home) to cover the distribution. You would still
have to do the math to see if there were enough expenses left over for you to
claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully
covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual
tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of
an IRS inquiry.
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But, you actually may want to pay some tax on that distribution so that you can claim an education credit. You can and should claim the
tuition credit before claiming the 529 plan earnings exclusion, because it is more generous. The educational
expenses you claim for the 1099-Q should be reduced by the amount of
educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot
count the same tuition money, for the tuition credit, that gets you an exclusion from the taxability
of the earnings (interest) on the 529 plan. Since the credit is more generous;
use as much of the tuition as is needed for the credit and the rest for the
interest exclusion.
In addition, there is another rule that says the
10% penalty is waived if you were unable to cover the 529 plan withdrawal with
educational expenses either because you got scholarships or the expenses were
used to claim the credits.
Total qualified expenses
(including room & board) less amounts paid by scholarship less amounts used
to claim the Tuition credit equals the amount you can use to claim the earnings
exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including
room & board)
-$3000 paid by tax free scholarship
-$4000
used to claim the American Opportunity
credit
=$3000 Can be used against the 1099-Q
Box
1
of the 1099-Q is $5000
Box
2
is $600
3000/5000=60% of the
earnings are tax free
60%x600= $360
You have $240 of taxable
income (600-360)
Yes
No
