529 tax and Michigan Schedule 1 Line 21

[zhengsimon]

Hello -

I had a qualified 529 withdraw (1099-Q) in 2021.  This amount wasn't include in the Federal Adjusted Gross Income (AGI).  I experienced two issues in Turbo Tax Premier -

1. The gain I got from the withdrawal was taxed on Federal Tax. I know the gain is supposed to be free for qualified withdrawal but for some reason it was taxed. 

2. TurboTax copied this amount over to the Michigan Schedule 1 on Line 21 as a subtraction.  This isn't correct according to the Michigan instructions for the Schedule 1.  The amount should not be included unless it was included in the Federal AGI.  This mistake resulted in a much higher calculated refund.  After filing, I received a letter from the Michigan Treasury explaining that I had to correct this.  If I'm wrong... I need to know so I can fight it with the State of Michigan... but it's impossible to actually report such issues to Intuit! 

You help is appreciated!

[Hal_Al]

You may have a more fundamental problem. You say " I know the gain is supposed to be free for qualified withdrawal but for some reason it was taxed"  and " This amount wasn't include in the Federal Adjusted Gross Income (AGI)".

If it got taxed, at the federal level, it was included in your federal AGI.

But you should review how it got  taxed, if it was a qualified distribution/withdrawal  (your qualified expenses, including room and board, exceed box 1 on the 1099-Q.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

[KrisD15]

To continue the conversation-

I think you are saying that the entire distribution was not reported as income, but you were taxed on some of it. 

(a portion of the earnings) 

That taxable amount would show up on your Schedule 1 and carry over to your 1040 line 8. (as well as any other additional income you may needed to claim)

Next, you say it was carried over to the Michigan Schedule 1 line 21 as a SUBTRACTION,  but line 21 reports Net Operating Loss. 

An ADDITION of the distribution would be reported on your MI Schedule 1 line 8. 

Michigan follows most of the same tax rules concerning distributions as the IRS does on the federal return, unless the distribution is used for a private K-12 school. 

Please look over your returns, the Michigan Schedule 1 and the letter from the state.