It
depends on your exact situation. Your distribution is made up of your
contributions which is your basis (box 3 of 1099Q) and also your earnings (box
2 of 1099Q). The contributions are never taxable. However, when your total distribution is greater than your adjusted qualified education expenses, then your earnings
are taxable.
Your qualified education
expenses are the expenses that are actually paid in 2016 and include things
like tuition, books, etc. Please
refer to pages 56-57 of pub 970 under the heading, "qualified education
expenses" to identify the exact types of expenses that are included.
https://www.irs.gov/pub/irs-pdf/p970.pdf
However, with respect to the Form 1098T, schools have the option of reporting tuition in either box 1 or box 2 of this form. If they report in box 1, they are reporting the amount of tuition the school actually received. If they report in box 2, they are reporting the amount of tuition that the school billed, which may or may not be the same as the tuition that was actually paid to the school in 2016.
Qualified education expenses are reduced by the
following and these amounts are generally reported in box 5 of your 1098T:
- the tax free part of
scholarships and fellowship grants
- veterans educational
assistance
- the tax free part of
pell grants
- employer provided
educational assistance
- any other nontaxable
(tax free) payments (other than gifts or inheritance) received as
educational assistance
Qualified education expenses are also reduced by the
amount of educational expenses that were used to calculate an education tax
benefit, such as the American Opportunity credit. Please refer to
pages 58-59 of pub 970 under the headings, "figuring the taxable portion
of a distribution" "taxable earnings", and "coordination
with American Opportunity and lifetime learning credits" for additional
information.
Additionally, there is also a 10% penalty tax when you
have a taxable distribution but there are exceptions to this tax such as if you
received a scholarship or claimed certain education tax benefits. Please refer
to page 60 of pub 970 under the heading, "additional tax on taxable
distributions" for additional information. https://www.irs.gov/pub/irs-pdf/p970.pdf
