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Level 1

My son got a distribution from his SEP- he used for College, the 1099 R is in his name-he is my dependent. How is do we input so it isn't taxed? Box 7 has a 2.

I have entered the 1099 R and entered his college costs, but since he is a dependent it appears as if Turbo Tax is not providing a way to apply his college costs to his SEP disbursement.  Do I have to override the forms or something? 

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Level 7

My son got a distribution from his SEP- he used for College, the 1099 R is in his name-he is my dependent. How is do we input so it isn't taxed? Box 7 has a 2.

The portion of the distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty, however it is still subject to income tax if the SEP IRA is not a Roth IRA. 

Being claimed as a dependent, he still gets the $6,300 standard deduction, however income over that amount is going to be taxed. 

Do not do an override.  IRS will catch this and you will be billed later for additional tax (plus interest and possibly penalty). 

See below for more detail.

"Normally, if you withdraw money from a traditional or Roth IRA before you reach age 59-1/2, you would pay a 10% early distribution penalty on the distribution, in addition to any regular income tax due. There is, however, an exception for distributions used to pay qualified higher education expenses. The portion of the distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty. You will still pay income tax on the portion of the distribution that would otherwise have been subject to income tax. All this exception does is avoid the 10% additional tax on early IRA distributions."

Source: http://www.finaid.org/savings/retirementplans.phtml

IRS link also states this:

https://www.irs.gov/publications/p970/ch09.html

1 Reply
Level 7

My son got a distribution from his SEP- he used for College, the 1099 R is in his name-he is my dependent. How is do we input so it isn't taxed? Box 7 has a 2.

The portion of the distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty, however it is still subject to income tax if the SEP IRA is not a Roth IRA. 

Being claimed as a dependent, he still gets the $6,300 standard deduction, however income over that amount is going to be taxed. 

Do not do an override.  IRS will catch this and you will be billed later for additional tax (plus interest and possibly penalty). 

See below for more detail.

"Normally, if you withdraw money from a traditional or Roth IRA before you reach age 59-1/2, you would pay a 10% early distribution penalty on the distribution, in addition to any regular income tax due. There is, however, an exception for distributions used to pay qualified higher education expenses. The portion of the distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty. You will still pay income tax on the portion of the distribution that would otherwise have been subject to income tax. All this exception does is avoid the 10% additional tax on early IRA distributions."

Source: http://www.finaid.org/savings/retirementplans.phtml

IRS link also states this:

https://www.irs.gov/publications/p970/ch09.html