I believe that there is an error in the TurboTax QTP computation of taxable distribution on the 1099-Q worksheet.

[mpantelic]

On the 1099-Q worksheet (line 2c) it appears to have subtracted the 1098-T scholarship amount (box 5) from the tuition paid (box 1) and uses that as the "adjusted qualified expenses applied". This renders a large amount taxable which should not be.

[DawnC]

You do not have to report the 1099-Q if you had sufficient educational expenses, including room & board to cover the distribution.  If you have to report the 1099-Q, the order in which you enter the 2 forms matters.  If you entered the 1099-Q first and then the expenses, the program should ask if you wish to apply the expenses towards a credit or the distribution. If you enter the 1098-T first, the program may compute the credit first, and when the 1099-Q is entered later, the program may not give you the option and simply tax the distribution.  You can delete both forms and re-enter them, reporting the 1099-Q first (if you even need to report it).  

Please see this discussion that explains the relationship between the 1099-Q, 1098-T, education expenses and your options in reporting this data (student dependent situation).  

And here is another discussion for a taxpayer student (non-dependent).    

Form 1099-Q information

[mpantelic]

Thank you for your help!  These problems seem to arise because TT makes assumptions on the back end about what you are going to do... For instance, it always seems to assume that I (the parent) am going to take an educational credit when it does calculations - but I cannot take the credit, and confusion sets in.  Sometimes trying to undo that afterward is very complicated or impossible without starting over...

I have sufficient (more that sufficient if I account for R/B) expenses to cover the 529 distribution.

I would be more than happy to omit the 1099-Q entry on my daughters (dependent) tax return.  BUT Can I also safely omit entering the 1098-T info on my tax return if I am not taking ANY related deductions/credits?

[J141]

This error continues in Turbotax 2020 edition. It is just a mess. The Easy Step instructs you to enter 1099! and 1098T but nowhere does the interview process ask you to insert info on college costs like room and board. In my case the tax bill was several thousand dollars too high, both because it was treating the difference between the 529 withdrawal and tuition paid as taxable income, and also because it added the 10% penalty for non-educational uses of 529 withdrawals on form 5329. 

It appears one can add educational expenses by clicking on the student's name and going to their education expenses form, but this is almost impossible to figure out.  

Even after adding educational expenses apart from tuition by hand, Turbotax is subtracting 10000 and I am still, according toTurbotax, having to treat some of these withdrawals as taxable income. That surely is wrong. 

Can somebody from Turbotax look into this? My confidence in this program is shaken.

[AmyC]

@J141  The program has a flow of logic. If you enter the 1099-Q first, there are no expenses and it is all taxable. If you enter the 1098T first, then the program knows there are expenses to go against the 529/ 1099-Q.

Once you enter the school, select the student, and add other information, things change.

If all of the 529 went to qualified education expenses plus room and board, you can delete the form 1099-Q.

For full details, see page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education and 529 for Room and Board.

Of course, if you qualify for AOTC, you may want to make some of it taxable, up to $4,000, to the student in order to qualify.