Why is TT (1099-Q entries) entering a penalty for non-qualified distributions when the entire distribution was for allowable educational expenses?

[Anonymous]

1099-Q gross distribution was $10000 with earnings + basis equalling this amount. Not a trustee-to-trustee transfer. State qualified program

[ColeenD3]

Did you enter the tuition on Form 1098-T into the program yet? The program needs to match the distribution with the tuition.

Here's how to get to the 1098-T screen if you haven't visited the Education section yet:

1. Open (continue) your return, if you don't already have it open.
2. Search for 1098t and select the Jump to link at the top of your search results.
3. On the Do you want to enter your higher education expenses? screen, answer Yes.
4. Answer Yes to Did you get a 1098-T for the year? and Continue.
5. 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.

From the Education Expenses Summary screen you can:

• Select Add A Student if you need to enter a 1098-T for someone else (and then resume steps 4 and 5 above); or
• Select Edit to revisit the 1098-T for a previously-entered school or Add New School to enter a new 1098-T.

Some important tips about entering this form:

• 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, you can 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.
• 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 in the Education interview.
• Leave blank boxes blank. Don't enter 0 for any blank boxes on the form, as this generates errors

[Anonymous]

Colleen, thank you so much for alerting me to the 1098-T. In follow-up, I am a grandparent who paid for a grandchild's private elementary tuition from the account that I own on their behalf as a beneficiary. Since this is a newly expanded eligible situation, the religious school may not understand the need to supply a 1098-T. So if I fill it out manually, it looks like I'm the beneficiary and just doesn't seem to flow correctly, to offset the 1099-Q distribution from the 529 plan state sponsor. Do you have any further thoughts on how I can correctly enter information in TT in this situation? It did not seem like I could "Add a Student" - it keeps asking me if the 1098-T is for me or my wife.

[SamS1]

Check the Social Security number on the form.  Is it in your Social Security number of the Beneficiary?   If the distribution was made directly to the educational institution or directly to the beneficiary, the 1099-Q should be in their name.  If a distribution is made to the account holder, Form 1099-Q will be issued in the name of the account holder.

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[Anonymous]

Thank you Sam. After further research, I found the following: "When 529 plan funds are used to pay for qualified education expenses there is usually nothing to report on your federal income tax return. Form 1099-Q and Form 1098-T will list the amount of the 529 plan distribution and how much was used to pay for college tuition and fees, but it is up to the 529 plan account owner to calculate the taxable portion." (My italics). I received the 1099-Q form as the 529 account owner, and I disbursed funds for qualified expenses only for non-dependent minors in K-12 private school. Based on this information, it would seem that there is no requirement to report the 1099-Q information on my return; I hope this information will be helpful to other grandparents who have used their 529 plans for only qualifying education expenses.

[DaveF1006]

Please visit this Turbo Tax link for more clarification on  this subject.

[Anonymous]

Perfect, thank you! The link exactly addresses my issues.