Helping my dependent child with her 2020 tax return. She received a 1099Q as a beneficiary of a 529 plan and used the entire distribution for qualified education expenses or returned it to the 529 (housing was refunded due to covid forcing student to move home). When she enters the 1099Q and the amount she returned to the 529, her tax liability increases. She did not receive a 1098T (which I don't think would go on her return anyway) because her scholarships actually exceeded her total expenses by a small amount.
Where in Turbo Tax should she enter her education expenses so that she is not taxed on the 1099Q since the entire distribution was either returned to the 529 or used for qualified education expenses?
If your Distribution did not exceed your Qualified Education Expenses then you don't have to enter the information from 1099-Q at all.
If the Distribution doesn’t exceed the amount of the student's qualifying expenses, then the distribution is not Taxable and you don't have to report any of the distribution on your tax return. I understand that this sounds strange, especially regarding taxes, but the IRS does not request any additional information to substantiate whether or not your Distribution exceeded your actual qualified expenses. Nevertheless it would be wise to keep a good record of these expenses just in case your return gets picked up for examination.
To correct this issue simply remove the information from the 1099-Q, or if you like, TurboTax allows you to substantiate this information by countering the amount from the Distribution by entering Education expenses. You can find the Education Expenses Section under Deductions and Credits.
My daughter's bill was $12,071 but there were covid adjustments totaling $7,052.04 which made the balance $5,018.96. Her scholarships totaled $6,875 so the school sent her a check for $1,856.04. How and where do I account for this income of $1,856.04? Thank you.
You cannot "double dip". If her tax free scholarships covered her total expenses, then you can't claim that her 529 plan distribution (box 1 of the 1099-Q) was used to pay the same expenses. She very well may have some taxable distribution.
However, a 529 plan distribution can be used for expenses that don't show on a 1098-T (tuition & fees). That is, you can claim the 529 distribution for room, board, books, computers and other course materials,
Technically, she also needs to account for the "small amount" of scholarship that exceed expenses. I'm of the opinion the school was remiss in not issuing a 1098-T.
Enter the the 1099-Q first
In TurboTax (TT), enter at:
Federal Taxes Tab
Deductions & Credits
-Scroll down to:
--ESA and 529 Qualified Tuition Programs (1099-Q)
In TurboTax (TT), enter expenses at:
Federal Taxes Tab
Deductions & Credits
-Scroll down to:
When asked if you got a 1098-T, answer that you qualify for an exception
Qualified Tuition Plans (QTP 529 Plans) Distributions
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.
You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (usually on the student’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
You have $240 of taxable income (600-360)
**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! 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, in case of an IRS inquiry.
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."
***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.
Provide the following info for more specific help:
- Box 1 of the 1099-Q
- Box 2 of the 1098-Q
- Was any of the box 1 amount put back in the 529 plan after the school refund?
- Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
- Room & board paid. If you live off campus what is school's Room charge &meal plan charge. Does she live at home?
- Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
- Did your daughter have any other income for the year
She used the 529 to cover education expenses that were not paid to the university such as buying a computer, books, etc.
Her scholarships exceeded her university expenses so the university sent her the difference. The schools policy states they will not issue a 1098T if a student's scholarships exceed their university expenses.
Given the info I have provided above I'm not sure how to proceed with the advice you have provided. Can you please clarify? Is my daughter basically to create a 1098T in her Turbo Tax filing? Thank you.
First, as RayW7 first suggested, ignore the 1099-Q. Since you know it cover expenses, none of it is taxable and it does not need to be reported.
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.
She has $1,856 of taxable scholarship to report as income. If that is her only income, it is less than the filing threshold* and she does not need to file a tax return. You can ignore that too.
*Your dependent child must file a tax return for 2020 if he had any of the following:
- Total income (wages, salaries, taxable scholarship ) of more than $12,400 (2020).
- Unearned income (interest, dividends, capital gains. unemployment) of more than $1100.
- Unearned income over $350 and gross income of more than $1100
- Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12,400 if under age 18)
- Other self employment income over $432, including money on a form 1099-NEC
Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.
She has other income totaling about $6k. Not sure how to proceed and ensure she is reporting the money she received from the university correctly. The university sent her $6,822.54 and $5,454 of that was promptly returned to the 529. The difference is what I'm concerned about. Thank you.
If the $6K other income is wages, she still does not need to file. So you do not have to report the scholarship income.
However, if she needs to file to get federal withholding refunded (box 2 of the W-2), then she technically is suppose to report the $1856 as income, on her return. (You could actually leave it off since it doesn't change the bottom line).
In TurboTax (TT), enter at:
Federal Taxes Tab (Personal for H&B version)
Deductions & Credits (not income)
-Scroll down to:
Say no to the 1098-T question and that you have an exception to not having one. You will eventually reach a screen to enter scholarships. Enter $1856. Do not enter any other numbers. The scholarship will be added to line 1 of form 1040 with the notation SCH 1856.
Ugh. I can't believe I didn't know that. I had her pay estimated taxes of $1k and now there is no way to recover any of that without filing. I am so confused and I'm so sorry she parted with $1k without the need to do so. This sucks. What to do....
She should qualify for free TurboTax. If TT tries to upgrade you for entering the scholarship, you could leave it off (since there's no 1098-T, the IRS doesn't know about it) or switch to free file. She only gets income tax back, not social security or Medicare.
TurboTax also has another free product called the Free File Edition (not to be confused with the regular Free Edition). It has free Federal preparation and free State preparation. There is no efiling fee. It is not available after October 15
The Free file Edition can handle a 1099-MISC.
The Free file Edition is more fully-featured than the regular Free Edition. The Free File Edition can prepare Schedule A, C, D, E, and F that the Free Edition cannot.
To qualify for free 2020 federal and state tax returns through the IRS Free File Program delivered by TurboTax, you just need to meet one of these requirements:
- Your 2020 household AGI is $39,000 or less;
- You qualify for the Earned Income Tax Credit (EITC); or
- In 2020, you served as active duty military (including Reservists and National Guard) with a maximum AGI of $72,000, and you have a military-issued W-2.
The FREE FILE Edition is located at:
How to switch and start over in Free file Edition
Thank you for helping with this.
I was trying to file for her using Free Edition and now TT saying she must upgrade to Deluxe. I think this is because I switched her NOT to be claimed as my dependent to see if that's a better use of the tax credits available given my income vs her income. Line 11 of MY 1040 is currently showing $96,355 and I expect it to increase by no more than $10k after I receive some outstanding 2020 documents. My daughter's grandfather owns the 529 and my daughter is the beneficiary.
1099Q Box 1: $9,069.92
1099Q Box 2: $4,172.60
After the school refund of $6,822.54, $5,454 (the amount paid by the 529 directly to the university) was returned to the 529 making the net 529 distribution $3,615.92. My daughter kept the difference of $1,368.54. After the university adjusted its fees, the expenses totaled $5,506.46 with scholarships totaling $6,875. This explains the $1,368.54 excess that my daughter kept.
My daughter is the recipient of the 1099Q. A 1098T was provided by the community college she attended while in high school (2020) with box 1 having $161.25. The university she attended full time in the Fall did not and will not provide a 1098T.
She paid room and board and that was shut down due to covid and the money was refunded to her (and returned to the 529 in the $5,454 mentioned above). She did pay a housing deposit of $350 in 2020 and that was not refunded.
My daughter's qualified education expenses in 2020 (after the university refund) are $5,967.71 (tuition and fees), $350 (housing), and $3,055.92 (computer, books, etc.). This totals $9,373.63. Her scholarships totaled $6,875.
My daughter had W2 income of $2,998.91 and 1099G income of $6,030.00. She paid estimated taxes of $1,000.
Thank you for helping! I really appreciate it.
This just got more complicated.
Here's what I understand so far:
- The 1099-Q is in your daughter’s name (she's the recipient) not grandpa
- The net distribution after returning money was $3616. That makes the earnings portion $1663 (3616 / 9070 x 4173 = 1663).
- Total expenses are $9374
- Scholarships are $6875
- The student is your dependent
- She has $9029 of other income, including $6030 of unemployment. Unemployment is not earned income, so she will not get a regular standard deduction. She’s not gonna get all her withholding back and she does need to report either the 529 distribution and/or the taxable scholarship
Are you planning to claim the tuition credit? At your income (assuming Married Filing jointly filing status), you are eligible. There is a loop hole available to claim it by having your student report more scholarship (or 529 money) as taxable. See example previously provided.
Yes, I really messed this up and have been really upset since discovering she didn't need to file a 2020 and I should never have instructed to send in estimated taxes of $1k. My heart sinks when I think about it. Thanks for helping me work through this. I would actually love to hear that she's required to file for 2020. 😉
Yes, 1099Q was sent to my daughter. We were careful to send all distributions directly to either her or the university.
Correct on the net distribution of $3,616.
Correct on total expenses and scholarships.
I can claim the student as a dependent but I'm open to NOT claiming her if that helps correct my earlier mistakes. It appears neither of us will receive a tuition tax credit because her scholarships exceed the university expenses.
Sorry, I don't understand what you mean about not reporting the 529 distribution. Should I remove the 1099Q from her return? Should I still include the 1098T she received on her return, and enter 1098T info she did NOT receive on her return? How do I not report taxable scholarship. I don't understand what this means.
I do file married jointly but as stated above I didn't think a tuition credit was eligible because of the excess scholarship. Which return would purse a tuition credit and how? I don't know the example you're referring to to report more scholarship or 529 money as taxable. How is this done and on which return?
Thanks for helping with this mess.
There is a loophole available for you to claim a tuition credit*, even though her expenses were covered by scholarships and 529 plans.
Yes, you should remove the 1099-Q from her return. You can do that because it will be fully covered by educational expenses.
Yes, she is required to file a return (because of the unemployment, #2 in the filing requirements previously listed above)
She had $9374 in expenses. We assign $3616 of those to the 529 distribution making it tax free (so don't report it). We assign $4000 of expenses to the AOTC, allowing you to claim that. That leaves $1758 to be covered by the scholarship. That means she has $5117 of taxable scholarship to report (6875 – 1758 = 5117).
Scholarship income is treated as earned income for purposes of calculating a dependent’s standard deduction. So, effectively, none of the scholarship will actually get taxed (but the unemployment will)
The simplest thing to do is enter a 1098-T with box 1 blank and $5117 in box 5. Enter no other numbers. It's OK to change the numbers from the actual 1098-T. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
It's that simple.
"I can claim the student as a dependent but I'm open to NOT claiming her if that helps correct my earlier mistakes".
No, that's not allowed. Or more specifically, she is not allowed to claim herself or the tuition credit because she CAN be claimed as a dependent.
*This is not some sinister scheme. "Everybody" is doing it. From the 2019 form 1040 instructions (pg 95): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 18c, and IRS.gov/EdCredit. Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.