I'm being taxed for qualified educational expenses, reported in 1099-Q, for a non-dependent son. Does anyone know how to avoid that in turbotax?

[valok]

My son finished college and started a job in 2021, making him non-dependent. He filed the 1098-T in his tax returns. When I imported the corresponding 1099-Q into my returns, my tax increased substantially, which is wrong.

[KrisD15]

Who was issued the 1099-Q, you or the student? 

What was the 1099-Q used for? 

If the funds were transferred to the school or if the distribution was made by the student, the 1099-Q would be issued to the student, which is how it was meant to be done. 

If the 1099-Q was issued to you, and if there is tax due because of that distribution, you would be liable for that tax. 

If the distribution was used for expenses not on the 1098-T, such as room and board, keep a receipt for that payment along with the 1099-Q with your tax file. 

In this case, either do not enter the 1099-Q, since it was used for room and board, or enter it and tell the TurboTax program that it was for someone not on your return and it was used for education expense. 

If the distribution was used to pay expenses which are reported on the student's 1098-T, you will need to communicate with the student to see if those expenses can be used by you to allocate to the 1099-Q OR if the student used the expenses for a credit on their return. 

Your program cannot compute the tax since it cannot match it to the 1098-T of the now non-dependent student. 

[valok · Accepted solution]

thank your for the prompt response. Here is some more information:

Who was issued the 1099-Q, you or the student?

>>1099-Q is issue to me (dad) as receipient.

What was the 1099-Q used for?

>> it was used for the beneficiary listed in 1099-Q, my non-dependent son. All of the amount listed in 1099-Q (earnings + basis) was used towards my son's qualified education expense.

Part of the distribution (in 1099-Q) was used towards the amount listed in 1098-T (reported in my son's tax) and part towards other qualified expenses (room, board etc). I would like to report 1099-Q in my turbotax, but while there is an option to enter the name of the non-dependent, there is no option to tell that it was for qualified expense. This results in adding taxes for this amount. If there is a step by step example, can you please share it. I have now tried multiple times, deleting the 1099-Q form, but no luck. Thanks so much!!

[KrisD15 · Accepted solution]

Your TurboTax program can't make the calculation because the student is not claimed on your return as a dependent. 

You'll have to do some coordinating with your son. 

(if you have a future student, have the funds transferred directly to the school, it makes things so much easier and the 1099-Q will be issued to the student)

The amount you used for room and board should be applied to your 1099-Q. The student would have no reason to claim that expense on his return. It can't be used for a credit. 

Now you need to figure what remains of the distribution. 

If you need expenses that are listed on the 1098-T to cover the remaining distribution, the issue is if the student used those same expenses for a credit on his return.  

You can also use expenses such as books and supplies that are not on the 1098-T. 

Ok, so lets say you need 5,000 expenses above the room and board expense. 

Look at the 1098-T, does it show 5,000 tuition (Box 1) above the amount of scholarships (Box 5)? 

If yes, good. (remember you also can add the books and supplies not reported on the 1098-T). 

Now the big question is "Did your son use those expenses for a credit?"

If he did not get an education credit, great, that's it, you're done. The distribution was covered by education expenses, keep copies of the 1099-Q, 1098-T and receipts with your tax file. DO NOT enter the 1099-Q.

The 1099-Q is used by the program to determine if income or tax needs to be reported, the 1099-Q itself is NOT REPORTED ON the tax form itself. 

IF HE DID GET AN EDUCATION CREDIT, and he already filed, refigure his tax return using the 1098-T with the amount you need subtracted OUT of Box 1. 

(Use a MOCK account and do a MOCK return)

It is very possible that a reduced amount in Box 1 will have no impact. If so, again, just file the copies with your files, don't enter the 1099-Q. 

If it does make a difference and the distribution becomes taxable, you and your son will need to decide whether he files an amended return and gives you the expenses or you claim the taxable portion of the 1099-Q. 

[valok]

thank you so much @KrisD15 ! i wish I had this information when my son was still in college and became independent. Anyways, I know what to do based on your response.