how to make part of 1099-Q distribution taxable to take full American Education Credit?

[tac105]

My child has Tuition expense of 55k in Box 1 of 1098-T and 28k in scholarship in Box 5.  The 529 distribution amount was 27k (1099-Q).  Additionally there was $500 in books that was paid outside of the 529 distribution.  TT currently only calculates an AOC credit of $500 because we cannot "double dip" to use the same tuition expense of 27k both as a tax-free distribution and as the Qualified Educational Expense to claim the American Opportunity Credit.  

How do I make $3500 of the 1099-Q distribution taxable to claim the full AOC?

Thanks

[NCperson]

@tac105 was any of the $28k in scholarships "unrestricted" in how the money was used?  For example, Pell Grants are "unrestricted".  How much was Pell? 

If there was at least $3500 of unrestricted scholarships,  your child would report that $3500 as income (if they even have a filing requirement) and you would use the $3500 to add to the $500 to create the $4000 of QEE required to maximize AOTC.   

In this approach, there would be $24.5k of QEE and $28k of scholarships reported by your child, netting to $3500 of income.  You would report the other $3500 of QEE plus the $500 of books as QEE on your tax return. 

However, if all of the scholarships are "restricted" to tuition and books, it's not going to work.  

[Hal_Al]

Q. How do I make $3500 of the 1099-Q distribution taxable to claim the full AOC?

A. You don't make $3500 of the distribution taxable. You make $3500 of it non-qualified, by allocating $3500 of the tuition to the AOC.  TurboTax (TT) will then make a portion of the earnings, in box 2 , of the 1099-Q taxable.

The TT interview handles this automatically (theoretically). But, you have to follow the interview carefully. Mistakes are frequent.  In particular, enter the 1099-Q before entering the 1098-T. Also, be on the look out for a screen  “Amount Used to Calculate Education  Credit” or a screen  "Choosing a larger education credit or deduction". Verify the number used  is $4000 or change it.  TT will then calculate the taxable amount of the 529 earnings and even apply the penalty exception.  

Room and board are qualified expenses for the 529 distribution (but not for the AOC or tax free scholarship), even if the student lives at home. 

[tac105]

Hi, 

The scholarship is awarded by the school, and applied directly against the tuition.  It was not a Pell Grant or other govt scholarships.  

The child is filing independently (I am not claiming him as a dependent) and has W2 income of 31k.  I just somehow cannot get to the screen where it asked me how much of the 529 distribution is unqualified.  Currently it applies the entire distribution as QEE and my only remaining educational expenses are the books.  I can't seem to figure out how to shift some of the distribution to unqualified to take the full AOC.

Thanks

[Hal_Al]

  Q. I just somehow cannot get to the screen where it asked me how much of the 529 distribution is unqualified.  

A. There is no such screen.  You enter the 1099-Q and the expenses and TT calculates that.

If you are not claiming him as a dependent, you cannot claim the AOC, on your tax return.  He can probably claim it on his return, but he may not get the full $2500, if he is under 24. 

If all you are trying to do is reduce your expenses claimed, by $4000, so he can claim the AOC, on his return, just enter $4000 less tuition paid. 

But that is not necessary. Surely you have $4000 or more in room and board and books.  Just don't enter the 1099-Q.

The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can. 

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 don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships.

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." 
2. 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”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

[KrisD15]

Who was issued the 1099-Q, you or the student?

If the 1099-Q was issued to the student, are you are entering this all on the non-dependent student's return ?

@tac105

[Hal_Al]

My previous comments assumed the parent was the recipient of the 1099-Q. 

If the student was the 1099-Q recipient, there's enough room and board, that the 1099-Q does not need to be entered, even on the student's return. 

That said, designating some of the 1099-Q to be taxable is more difficult, in this situation.   In addition to entering numbers, you must complete the “Education Information” sub-section. In particular, be on the lookout for a screen “education expenses used for a tax credit” (or similar wording). It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K). You can change it for the amount you want to allocate to the ed credit ($4000). If you don't get that screen, check the student information worksheet. You can change it there (line 17). Make the change in the first column.  

But, you should also enter room and board and books/computer at the other expenses section.  Be sure the 1099-Q was entered before the 1098-T (you may have to delete both and start over). 

[tac105]

Thanks all, I was able to use the Forms instead of Interview process to enter 4000 used for credit in the Student Information Worksheet. TT calculated the portion of QTP distribution that was taxable properly.