Why 1099-Q form increased my tax?

[pravda66]

I have 529 Plan in WI opened for my daughter (full time student, age 20, claimed as dependent on my tax return).  I withdrew money from the 529 plan to be deposited on my checking account which I used to pay her Tuition expenses (my personal check to University).  This 529 Plan withdrawal was less than Tuition amount (Qualified Educational expenses).  I got 1099-Q on my name from 529 Plan and my daughter received 1098-T from College.  While preparing my tax return I entered info on educational expenses and then I entered 1099-Q information and my tax calculated by turbo tax went up after I entered info for 1099-Q.  Looks like, that portion of the distribution was added to my income. Please, could you tell me why? 529 Distributions should not be taxable if they do not exceed qualified educations expenses. Why do I need to pay taxes on that 529 distribution? 

[KrisD · Accepted solution]

The 1099-Q needs to be entered FIRST, then the 1098-T. The program then gives you an option to "Maximize Your Tax Break". The program may suggest you claim some of the distribution if the credit is worth more. 

1. Go back into Expenses and Scholarships(form 1098-T) under Deductions & Credits and click Edit
2. Click Edit next to the student's name and continue until you get to the "Here's Your Education Summary" screen (see screenshot) [NOT "YOUR EDUCATION SUMMARY SCREEN" move forward to "Here's Your Education Summary"]
3. Scroll down on this page and click Edit next to Education Information (see screenshot)
4. Continue through the interview questions, the last screen will ask how much you want to allocate to the credits (see screenshot)

This screen is important because it reports the total amount of expenses you have to work with, and how much of that you want to apply towards the education credit. If you do not want any of the distributions taxed, subtract the distribution amount from the total education expense and enter the difference. For instance, 10,000 expenses, 8,500 distribution, enter 1,500 and continue.

The distribution should no longer be taxed. 

Again, you have the option to tax the distribution and take the credit. You can experiment by entering 4000 on this screen (the max for the American Opportunity Credit) and see if the tax on the distribution is less than the credit and results in a larger refund for you. 

ADDITIONALLY, the distributions should always be made by the beneficiary or transferred directly to the school. If it is ever taxable, it should be claimed by the student and taxed at the student's rate. 

WHY DID THIS HAPPEN? If you enter the 1098-T first, the program allocates ALL the expenses to a credit, then when you enter the 1098-Q, it is taxed. 

[L-P-]

Even after I have entered 0 in the last screen, TT still increased my tax on the 1099Q distribution.  What else can I do?  The fund was directly sent to the school for tuition and fees.  It should not be taxed.

[Chico86]

The same is happening to me as well and it's very frustrating.  TT continues to tax me on a tax free distribution from a 529 plan for all education expenses and it makes me question the accuracy of this program.  I'm having a terrible time trying to figure out how to fix this.  

[AmyC]

@L-P-

@Chico86

A 1099-Q does not need to be entered if it was used on qualified education expenses. If you want to enter it, you can allocate room and board expenses to the 1099-Q. See 529 for Room and Board. 

[Industry]

This was exactly what I was looking for.  It's ridiculous that TurboTax doesn't recognize the correct order of operations.  Following this advice, putting the 1099-Q in first and the 1098-T in second (after doing it in the reverse order first, then deleting both of them and re-entering them in the right order) saved me about $1500.  Thank you so much!

I imagine this is super common since 1099-Qs usually come out right at the start of the year and 1098-Ts come out 1/31, which punishes people trying to be diligent and enter forms as they get them.