1099-Q earnings being taxed

[racutajar]

All my 529 distributions were used for qualified tuition expenses as well as books and computer.  I can't figure out why a portion of the earnings is being taxed. Am I entering wrong amounts somewhere? Or am I entering the wrong amount calculated for tuition paid?

[JaimeG · Accepted solution]

If your Distribution did not exceed your Qualified Education Expenses then you don't have to enter the information from 1099-Q at all.

If the Distribution doesn’t exceed the amount of the student's qualifying expenses, then the distribution is not Taxable and you don't have to report any of the distribution on your tax return. I understand that this sounds strange, especially regarding taxes, but the IRS does not request any additional information to substantiate whether or not your Distribution exceeded your actual qualified expenses. Nevertheless it would be wise to keep a good record of these expenses just in case your return gets picked up for examination.

To correct this issue simply remove the information from the 1099-Q, or if you like, TurboTax allows you to substantiate this information by countering the amount from the Distribution by entering Education expenses. You can find the Education Expenses Section under Deductions and Credits.  

[brianharg]

Doing my Sons return.  Entered both 1099Q and 1098-T info on his return (his SSN is on all the forms and I will not claim him as a dependent) - and other qualified expenses.  Amounts of Education exp is greater than the 1099-Q gross distribution - but still showing taxable???  Here is the info I entered (in rounded numbers).  

Gross distribution on 1099Q = 14,500
1098T from university = 13,500
Added $500 books/supplies and $800 for a meal plan

Total Expenses = 14,800 which is greater than the 1099Q

Student info worksheet looks like it is applying the $10,000 tax credit against my total expenses so showing "adjusted qualified higher education expenses"of just $4,800

It then does a calc to determine how much of that is taxable by looking at the "Distributed earnings"   from the 1099Q... this is Part VIII of the worksheet - it is calculating a pretty high taxable number since it is basically "disallowing" the $10,000.  

Both these amounts (the 1099Q and Education expenses) are showing up on my deductions side.  But the taxable amount (based upon the above) is still showing in Misc Income.

Should I just delete the 1099Q?

[ithos67]

I have a similar problem. We don't qualify for any tax credits, but my children's qualified expenses still exceed the distributions shown on the 1099-Q. Nevertheless, TurboTax is calculating a tax on a portion of the distributions. Something seems to be wrong.

[mintheocean]

How did that turn out? I decided to delete my form because it was showing as my income as well since I funneled the distributions through my checking account and clicked, "myself" as the payee. Apparently when you go into deductions you can fill out the expenses and it will calculate. But I read that if the worksheet shows more out of pocket than withdrawals, the form can be deleted anyway. Since I know I took out only allowed deductions: tuition, room and board, books, etc., I just deleted it. However, although I have submitted my taxes, I would not be surprised if I receive what I think is titled similar to an explanation of exclusion from my tax form. 

From now on, I am indicating the payee as the "beneficiary" regardless if I funnel it through my banking accounts and indicate them on my daughter's return if required since she will receive the 1099-Q. Confusing. 

[NCperson]

@mintheocean - while i didn't read the entire post in detail, the 1099-Q is confusing but is to be reported on the tax return based on whose SS# is on the form and NOT necessarily who owns the 529!

- if the 529 money was sent directly to the college (or the student), the student's SS# will be on the form and the student is to report it on their tax return.

- if the 529 money was sent to you, then your SS# will be on the form and you are to report it on your tax return.

- because there is normally a 1099-T involved....

• If a parent claims the child as their dependent,  the parent will claim the 1098-T and education expenses, regardless who paid.
• If the parent does not claim the child as their dependent, the student will claim the 1098-T and education expenses, regardless who paid.
• If the scholarships, grants, and other aid (except loans) is more than the tuition, fees, books, and supplies, the student will claim the 1098-T and education expenses, and will claim the excess aid as taxable income.

if reporting correctly in TT (and it does work, but agree it's complicated) , and there were more qualified expenses than the the 529 distribution, it should work out to "no impact" (no tax). 

[abcdefghijk]

If my student is a dependent and her box 5 is greater than box 1 (Box 1 is $9000 prepaid tuition $7500 and $1500 mandatory fees, Box 5 is $12000, $10000 of his scholarships is used for room and board therefore taxable. Since she is a dependent and she has taxable scholarships counted as income, his 1098-T and 1099-Q go on parents return correct? If Box 5 is $12000 but $10,000 was used for room and board, it is taxable. I know $10000 SCH goes on her return as well.  Since $10,000 of her scholarships are taxable and counted as income, we should get the AOTC correct? Thanks so much 

[MaryK4]

The fundamental principal is that you must determine what is taxable vs. nontaxable (thinking in terms if qualified vs non qualified) then apply the principle of "no double dipping".  The Worksheet below is one of the best I have seen to keep track of education expenses. 

American Opportunity Tax Credit Worksheet

@abcdefghijk

[spartan1961]

In my case, I had one 1099-Q that listed me (parent) as the recipient, but the expenses were for two of my children.  TurboTax 2020 does not know how to handle this -- it insists that each 1099-Q must be related to expenses only to 1 student!   Thus I have 2 choices: either omit the 1099-Q altogether (which makes me uncomfortable but seems to be ok based on other posts) or to show all the expenses as being for one of my children (which makes me uncomfortable because the expenses are split between them).  UGH!    I HAVE SPENT HOURS TRYING TO FIGURE THIS OUT.  THANKS FOR NOTHING INTUIT.  I WANT THE IRS TO PUT YOU OUT OF BUSINESS AND HAVE THEIR OWN SOFTWARE THAT EVERYONE USES.  (Not to mention a simplified tax code so we don't need to do this insanity every year).

[AmyC]

Remember, the entries in the program are for calculations to get your actual tax forms correct. As long as the forms are correct, that is our concern. If the 1099-Q is completely used, there is nothing taxable on your return. 

@spartan1961

[spartan1961]

Thank you for the kind thought, except...  why didn't TurboTax tell me that BEFORE I spent half a day trying to figure out why $7000 was being taken out of my rebate, and BEFORE I had to come to the support line and read 50+ messages?   (LOL I just received a bunch of notices from Intuit that I have earned a "Read 50 Posts Badge") .   THAT is what I'm complaining about.   (...and the fact that TurboTax really stinks at completing my Virginia State income tax).