529 disbursement

[royjordan]

I used my daughter's 529 plan to pay for her tuition in 2021.  I have both a 1099-Q for her ($30K+), and a 1098-T ($50K+).  My understanding is that this shouldn't increase her taxes, yet Turbotax increased both her State and Federal taxes by about $3k.  Does this seem right?  

Thanks.

[KrisD15]

To clarify, are you entering the forms into YOUR program or Hers? 

If yours, did you get an education credit?

Are you able to allocate the distribution to Room and Board rather than Tuition and Fees? 

[royjordan]

Thank you for responding.

All of the information is being entered into her tax return.  I have not tried to allocate since all of the expenses are charged directly by the school, the 529 disbursements have gone directly to the school, and the 529 disbursements are less than the school fees.  Am I making an incorrect assumption?

Thanks again.

[JillS56]

No, you are not making an incorrect assumption.

[royjordan]

So, please help me out here...either there is a condition which I am unaware of, that would make part of the 529 distribution taxable, some box somewhere on turbotax needs to be checked, or turbotax is not handling this situation properly.  I'm leaning toward deleting the 1099-Q and 1098-T forms from the turbotax return, and just having them as backup in case the IRS questions it.  Any thoughts?

Thanks.

[RaifH]

No, there is no provision like that. Sometimes it is advantageous to make a portion of the 1099-Q taxable if you are trying to maximize an education credit, but that does not sound like what is happening in this case. TurboTax requires the 1099-Q to be entered before the 1098-T to make the 1099-Q and 1098-T reported correctly. If it is not done in that order, the 1099-Q can show up as taxable. 

If you are claiming her, her 1098-T would be reported on your tax return. If she is listed as the recipient on the 1099-Q, which she should be if the payment went straight to her school, it would be reported on her return if necessary. If there is no taxable income, which it doesn't sound like there is because the entire amount was used for qualified education expenses, the 1099-Q does not need to be reported at all. 

If you are claiming her and not eligible for education credits because your gross income is too high, you don't need to report the 1098-T on your tax return either. 

[royjordan]

Well, I tried deleting both forms and re-entering them in the suggested order without any effect.  Since there seems to be general concurrence that there is no condition under which a 529 withdrawal made directly to an educational institution can be taxable, I will just remove those forms from the return.

Thanks.