TurboTax State for Alabama Taxing 529 Trustee-to-Trustee Rollover

[Glen215]

Question:  How do I have the earnings correctly excluded from a QTP to QTP rollover on the Alabama state form?  Is this a software bug?

Problem: The Alabama state form is including the earnings as income from the 1099-Q reported on the federal return of a Trust to Trustee transfer rollover of an out of state plan to the Alabama state plan. The earning is not being included/taxed on the federal form (correctly) but the Alabama state form is adding and taxing the earning (incorrectly). The state form doesn't allow me to tell it that it was a QTP to QTP rollover, which is not supposed to be taxed by Alabama per their rules.

What I did when entering the 1099-Q on the Federal Return:

I rolled over an out of state 529 plan to an Alabama 529 plan (CollegeCounts 529) as a Trustee to Trustee transfer. I entered the resulting 1099-Q into Tubotax federal with box4 checked (trustee-to-trustee), box5 checked (distribution is from QTP State), and box6 checked (recipient is not designated beneficiary).

I answered the interview questions as follows: I am the recipient (as on the 1099-Q), this distribution was not used to pay any education expenses, no death or being disabled of beneficiary, and the Entire amount was rolled over to the original beneficiary of the new account with no other rollovers within 12 months.

[AmyC]

AL very much allows and encourages you to move money to AL 529 account. AL allows you the full deduction for contributing even though you only rolled the money over.

In the program, you need to:

1. continue to Income, Payments and carryover for prior years, click done
2. Screen asks Did you Contribute to an AL 529?
3. mark that you contributed to an AL 529 plan 
4. enter the amount up to $10,000.
5. Continue
6. Enter amount rolled over
7. Continue

For more information, see Alabama 529 Savings Plan FAQ – Alabama DOR

An Alabama taxpayer filing jointly is eligible for an Alabama State income tax deduction of up to $10,000 for rollover contributions to the Alabama College Counts 529 Fund.

[Glen215]

Hi AmyC,

Thank you for taking the time to respond to my question and providing clear directions to getting to the Alabama rollover section (as well as the 529 contributions); but that doesn’t appear to solve my problem.

A more detailed description:

The rollover amount that is entered on the Turbotax interview screen is for taxable distributions from Alabama 529 plans. It is entered on Alabama Form 40 Part1 Worksheet for Line 8 line g-2 (Total rollover to another qualified plan)

The problem I am having is that the rollover came from a non-Alabama 529 plan, and its earnings are recorded on AL Form 40 Part1 Worksheet for Line 8 line f (Taxable earnings from non-Alabama Plan Form 1099Q). Any rollover entry on Part1 Worksheet line g-2 (AL Plan rollovers) is not subtracted from the reported earnings on Worksheet for Line 8 line f.

I know the 529 earnings of a rollover should not be taxed. Worksheet for Line 8 line f is for distributions I received from non-Alabama plans and used for educational expenses. Those 1099Q earnings will be taxed at the state level. It seems Turbotax should not automatically transfer rollover earnings from the Federal section to the AL Forms, or Turbotax should provide a way to modify the amount of the transferred earnings.

Possible Solution?

If I mark the non-AL 529 1099Q as an AL plan in the Federal section, Turbotax reports the rollover distribution on Part1 Worksheet Line 8 line g-1 (Total Distributions from AL Plans reported on Form 1099Q) and the rollover reported on line g-2 handles the 1099Q distribution.

[AmyC]

As long as the tax consequence is correct! You have the correct paper trail if questions are asked. Every agency knows that software must sometimes have a work around for these more unusual circumstances.

Brilliant thinking!

[RW31]

I have used the workaround in the previous post the last 2 years successfully.  I would have thought a known program problem would be fixed after 3 years.