529 Plan. Why am I being taxed on a portion?

[rnewton36317]

I used a distribution from my son’s 529 plan to pay for his college. Every dime went to his schooling. I was listed as the recipient on the form and my son is the beneficiary. I just withdrew the funds needed for his bill and supplies due (I have the receipts) and paid them. He got a refund for 1500 which I even redistributed right back into the 529 account the next day to save for his next semester. I entered the 1099Q in exactly as written, yet turbo tax is saying over 2000 will still be taxed. He received no outside scholarships. TurboTax says I make too much to claim tuition and expenses! 106000 now since they tacked on this darn 2000+ upping my gross income so they can tax me on it. All aid and scholarships given to him came directly from the school. Why am I being taxed? I thought all distributions were tax free as long as they paid for school! We did just that! Is this because his father will claim him? We are not married, just separated, but we get along. We alternate claiming our son from year to year. He is due to claim him this year. Need help. I don’t want t to be taxed if I did everything right. I would have never opened this thing if there was a chance I would be taxed. I would have been better off saving the money and paying directly! 

[KrisD15]

If the distribution was used for school expenses, you needn't enter the 1099-Q unless someone will use the expenses for a credit.

If the student received a refund, and the refund was re-deposited into the account within 60 days of a distribution, the funds are not taxable. 

When a 529 Plan is used for the benefit of the student, make the distributions in the name of the student. Transfers directly to the school results in 1099-Q issued in the name of the student. 

In your case, you need to coordinate with the student and the person claiming the student. The expenses can be used to offset the 1099-Q OR used to claim a credit, not both. 

Since the 1098-T is always issued to the student, the student should also initiate the distributions so that the 1099-Q is also issued to the student. This way the 1098-T and 1099-Q will be on the same return. 

If you enter the 1099-Q into your TurboTax program, you will need to select that it was used for education purposes for someone not listed on your return. 

The person claiming the student will need to account for this by lowering any education expenses they claim if they are claiming a credit. 

[Hal_Al]

Q. I used a distribution from my son’s 529 plan to pay for his college.  Why am I being taxed?

A. The interview is just too complicated because of the various scenarios. Since you know none of it is taxable, just delete the 1099-Q. It does not need to be reported. 

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 (or the other parent) to claim the tuition credit, if he qualifies.  You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. 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." 

1. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.