I hope someone can provide guidance. I have my first child in college and I'm struggling with the 529 stuff. Here is the situation with some simple numbers
Son's tuition: $20000
Scholarship from School: $10000
529 from Grandparent: $10000
Remaining out of pocket for dad: $0
As the parent (not grandparent), I enter in my son as a dependent and enter in the 1098-T information. I tried to enter in the 1099-Q, but Turbotax says that it isn't taxable and doesn't even let me enter in the 529 contribution (that's a good thing).
After entering all of this in the Deductions and Credits section (under Education), it shows that I (dad) had $10000 in expense (which is either a deduction or a credit, maybe?). Anyway, this changes what I get in the refund.
As best as I can tell, I (dad) am getting a deduction/credit even though I had no out of pocket last year (because it came from grandparent 529). Is that correct? Any guidance on how/where to check if that is the case?
Thanks for the help in advance. Generally not to much trouble with taxes, but this one is weird.
Yes, it is confusing.
The account the grandparents set up, should have had the student named as the beneficiary.
The funds distributed from that account should have been withdrawn by the student or transferred directly to the school. Those two ways would have resulted in the 1099-Q from that account being issued to the student. Then, as the Taxpayer claiming the student, you would have entered that 1099-Q into your program so that the TurboTax program could do the math.
You might want to check to see if the 1099-Q from the grandparents' account was issued to the student or to them.
If the distributions were made by the grandparents, you will need to get with them and either reduce the amount of tuition you claim for a credit, OR have them claim the earnings portion of the distribution as income. OR, if your student had other education expenses like Room and Board, that can be applied to the 529 distribution (but not the credit) AND the American Opportunity Tax Credit maxes out with 4,000 tuition/fees/book expenses, so using any more expense for that credit is foolish; however the Lifetime Learner's Credit does not max out until 10,000 expenses.
As you can see, the credits, fees, scholarships and distributions can be confusing in part because the IRS gives Taxpayers options about how to allocate them.
I HIGHLY suggest all distributions be transferred to the school in the name of the student in the future.
Technically, if you claim all the tuition for a credit, the taxpayer that was issued the 1099-Q could be found negligent for not reporting the distribution.
Pub 970 covers this in detail and is fairly easy to understand with several examples.
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let me make this simpler:
1) post the 1098T on YOUR tax return (from your response, I assume Box 1 is $20,000 and Box 5 is $10,000)
2) there is NO NEED to post the 1099Q in Turbo Tax.
First, look at the instructions on form 1099Q. It states: 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.
Second, whose social security number is on that form. THAT is who is responsible for determining whether any of it is taxable.
Third, Since your expenses (net of the scholarship) is $10,000 and your distribution from the 1099Q is $10,000, you have determined that none of the distribution is taxable. So put the 1099Q in a drawer with your documentation if the IRS ever comes calling.