1098-T qualified expenses understated

[cll999]

I received three 529 disbursements (1099-Q) in 2021 - for spring 2021 (January), fall 2021 (August) and spring 2022 (end of December) semesters.  The 2021 1098-T from the university is understated in that it seems to include qualified expenses (box 1) for fall 2021 and spring 2022 (box 7 is checked) payments, while not including spring 2021 expenses (these spring 2021 expenses were also not included in the 2020 1098-T from the university).  I think the problem might be that the university switched systems for the 2021-2022 school year and reporting for the spring 2021 expenses were not brought over properly.

In any event, this makes box 1 of 1099-Q too high relative to box 1 of 1098-T and thus some of the 529 disbursement on the 1099-Q is being taxed.  How do I handle?  Do I manually adjust the amounts in box 1 (and box 5) of the 2021 1098-T form in TurboTax?

[RaifH]

Your Spring 2021 tuition was not included on this year's Form 1098-T because it was included on last year's. Just as your Spring 2022 tuition was included on this year's Form 1098-T. 

This year, since you took the distribution from the 529 to pay for both spring 2021 and 2022, it muddies the water a little bit on how to report the distributions to accurately line up with the expenses. The IRS does not clearly state that 529 withdrawals have to be used for expenses incurred in the same year. If you used a 529 withdrawal for an expense that was reported in 2020, that is not disallowed, as long as the distribution was used entirely for qualified education expenses.

If that is the case, you can just not include the distribution used to pay for spring 2021 as a 1099-Q withdrawal this year. If the IRS were to question why it was not included, you would need to provide proof that you paid qualified education expenses incurred in 2020 with this distribution. You would not need to amend your 2020 return as it would not change anything on it, as long as no part of the distribution would be taxable or you claimed an education credit in 2020 that you would not have been eligible for if you had included the 529 withdrawal on your 2020 return.

[cll999]

So the recommendation is to reduce the amount on the 2021 1099-Q income side, versus increasing the amount on the 1099-T side.

However, not sure why but the wrinkle is that the 2020 1099-T I received from the same institution did not have box 7 checked and did not include the spring 2021 semester, as the qualified expenses (box 1) and scholarships (box 5) matched exactly to only the fall 2020 semester.  In this case, does the same recommendation still apply - reduce the 2021 1099-Q amount?

[RaifH · Accepted solution]

Interesting that they just seem to have omitted the 2021 spring semester entirely since it is not reported on your 2020 or 2021 1098-T. In that case, no, I would not do as I recommended above. Instead, I would include the tuition you paid for spring in the Box 1 amount for tuition paid. You can enter in the amount reported in Box 1 of Form 1098-T, then select This is not what I paid to this school and enter the actual amount you paid, including Spring 2021. Maintain your records to be able to document the actual tuition expenses incurred in 2021 since the 1098-T will not be sufficient proof. 

[cll999]

Thanks, that makes much more sense. On the 1099-T there is also a scholarship from spring 2021 that is not included - adding this to the box 5 amount does not change the tax impact.  I assume I do not need to adjust for this - there does not seem to be a mechanism on the form to do this as there is for the box 1 payments deviation.

[RaifH]

You can add the additional scholarship, but you have to menu dive a little bit to do it. If the scholarship was used for qualified education expenses and does not reduce any education credits you are getting, then it won't have an impact on your return:

1. In the Federal > Deductions & Credits section of your return, scroll down to Education and click Show more. 
2. Click Start/Revisit next to Expenses and Scholarships (1098-T).
3. Click Edit by the student's name.
4. Click Edit by Scholarships/Grants (for all schools)
5. Answer Yes to Did you receive a scholarship or Grant in 2021?
6. Enter any additional scholarships not reported on 1098-T in the Other Scholarships/Grants/Fellowships field.