Made $11K withdrawal from 529 Plan on 12/28/21 for Spring 2022 semester. Money direct to college. 1099-Q shows $11K more withdrawal than 1099-T expenses. How to input?

[GeorgeM777]

Here's how to enter your 1099-Q in TurboTax:

1. Open or continue your return.
2. Select Federal and then Deductions & Credits.
3. Scroll down to the Education section under All tax breaks.
4. Select, Show more and select Start or Revisit next to ESA and 529 qualified tuition programs (Form 1099-Q).
5. Follow the screens to enter your info.

Here's how to enter your 1098-T:

1. Open or continue your return
2. Select Search and search for 1098t 
3. Select the Jump to link in the search results
4. On the Do you want to enter your higher education expenses? screen, answer Yes
5. Answer Yes to Did you get a 1098-T for the year? and Continue
6. On the next screen, you can choose how you'd like to add your 1098-T. You can upload a digital copy from your computer or type it in yourself. Select which option you'd like and Continue
7. If you need to enter a 1098-T for someone else, continue through the screens until you get to the Your Education Expenses Summary screen, then select Add A Student

Some important tips about entering this form:

• Enter your 1098-T exactly as is, even if the amounts are wrong (this is common). You'll get a chance to correct this info and enter additional expenses later on
• Leave blank boxes blank. Don't enter 0 for any blank boxes on the form, as this generates errors
• Parents: If the student listed on the 1098-T is your dependent, enter the 1098-T on your return, even if your dependent paid the tuition
• Students: If you're not being claimed as a dependent, enter the 1098-T on your return regardless of who paid the tuition, unless it was your employer. In that case, just keep the 1098-T with your tax records
• TurboTax Free Edition doesn't support Form 1098-T

It appears you might have withdrawn too much from your 529 plan.  While 529 withdrawals are tax-free to the extent your child (or other account beneficiary) incurs qualified education expenses (QHEE), withdrawing more than the QHEE means the excess is a non-qualified distribution. You or your beneficiary — you get to choose who receives the money — will have to report taxable income and pay a 10% federal penalty tax on the earnings portion of the non-qualified distribution. The principal portion of your 529 withdrawal is not subject to tax or penalty.

@kcwojo 

[kcwojo]

GeorgeM777, Thank you for the detailed response. You mention one is able to correct/add to the 1099-T amounts. Where is this done?

Since the excess I withdrew ($11K) was used to pay for 2022 expenses (for which I have documentation), can I increase the amount paid for Room & Board to equal the excess amount I withdrew? Doesn't the IRS want to make sure that the amount withdrawn covers qualified expenses?  The excess withdrawn WAS use for qualified expenses, but just for the next calendar year (3 days later).

For 2022 taxes, my 1099-Q will be $11K less, since it was already reported for 2021. So everything balances out when considering the years 2021 and 2022. Would this be a good defense if I am audited? Thank you for your time.

[GeorgeM777]

If you need to add additional educational expenses (expenses that are qualified) yet not included on your 1098-T, continue through the section where you enter your 1098-T information.  In the search bar, upper right of your page, enter 1098-T and use the jump-to link.  After entering your 1098-T information, click continue and you will eventually get to  the page "Now Let's Gather Your Additional Educational Expenses" or similar page.  That page is where you can begin to enter your additional educational expenses not already included on your 1098-T.

It appears that the funds you withdrew on December 28, 2021 for qualified educational expenses in 2022 should be reported on your 2022 tax return and not on your 2021 tax return.  In other words, you might be able to claim, if questioned by the IRS, that there was no excess withdrawal at all for 2021.  

There is no definitive guidance as to when withdrawals should take place in order to be excluded from taxable income.  IRS Publication 970 which explains many matters of 529 tax law, makes no mention of reimbursement withdrawal deadlines.  Neither does IRS Topic No. 313, which explains Qualified Tuition Programs such as 529 plans. 

Consequently, some tax professionals recommend that the reimbursement for qualified expenses be effected in the same year that the expense occurred.  If this cannot be done, then perhaps reimbursing prior to March 31 of the next year may provide some back-up.  In your case, you took the withdrawal in the year prior (the last few days of 2021), but it was for educational expenses in 2022.  Therefore, perhaps the better option is to report that withdrawal on your 2022 return.  

@kcwojo

[kcwojo]

To GeorgeM777: 

Thank you again for you reply to my follow-up. I agree that reporting my excess withdrawal (at the end of Dec 2021) in the 2022 tax year would better. However, since the 1099-Q for 2021 already includes that excess amount, I have to somehow show it is not an excess, non-qualified withdrawal.

To do this, from seeing how the forms calculate the excess amounts, and the taxes due on it, I need to input additional (qualified) expenses on the 1099-T so that it is as least as much as the total shown on the 1099-Q. I have done this in the line item for the Room & Board. I did get it to cancel out any excess, and it does not calculate any tax due. 

So as long as I have backup documentation (and I do) that all of the withdrawals went towards qualified expenses, I think I should be alright. Let me know if you think otherwise.

Thank you so much for guiding me though this and providing your perspective.

[KrisD15]

If you are saying you took a distribution in 2021 to pay for expenses for January, February and/or March 2022, that is completely allowable; However, if the school was paid in 2021 for the first three months of 2022, why isn't that amount reported in Box 1 of the 1098-T. 

Box 1 should report what was paid in 2021. 

If you took the distribution in December, but paid in January, the numbers won't match. 

If the distribution was used for Room and Board, enter the amount of room and board. 

If the distribution was used for 2022 tuition, enter the 1098-T and click the "What if this is not what I paid" link under box 1 and add the expenses you paid for the first three months of 2022. 

NEXT year, enter the 2022 1098-T the same way, (use the "What if this is not what I paid link") but SUBTRACT the amount you added on the 2021 1098-T.

To avoid confusion going forward, have the funds transferred directly to the school. 

According to the IRS:

"For 2021, treat an academic period beginning in the first 3 months of 2022 as if it began in 2021 if qualified education expenses for the student were paid in 2021 for that academic period."

IRS Pub 970

[kcwojo]

To KrisD15:

Thank you for your input, and sorry for the delay in responding, but this is the first I got back to working on this.

The issue is the withdrawal was made on 12/28/21, via a check sent from the 529 administrator directly to the college, but by the time the college received and applied it, it was 1/6/22. So that is why the payment for the 2022 semester is not recorded on the 1099-T for 2021. And thus why the 1099-Q amounts don't match the 1099_T amounts.

The suggestion for clarifying on the 1099-T the year for the expenses is appreciated. I will make that adjustment. Thanks for that!

In the future, I will make sure the withdrawal and expenses match up per calendar year.

Thanks again for your time in responding!