MA College Tuition Credit - possible double taxation

[sg11sg]

After doing my federal taxes, when I got to the MA tax section of College Tuition deduction, my taxes went up 5% (MA rate) on the $58000 tuition that was paid out of a 529. Is this right? Isn't it double taxation on the basis if my contribution to the 529 was after tax money. Just to be sure, this was the case last year too. It doesn't sound right.

[RaifH]

No, this does not sound correct. Was the 1099-Q included as income on your federal return as well? Make sure the 1099-Q is entered correctly and marked as used for tuition expenses.

1. When entering the 1099-Q in Federal > Deductions & Credits > Education > ESA and 529 qualified tuition programs, make sure that a distribution code is selected only if one is on your form. Leave it blank if there is not one. 
2. After you return to Form 1099-Q Summary screen, hit Done. On What level of school did you attend in 2021? enter the correct one. If you are in post-graduate school, select college. 

Then verify your entry of the 1098-T from your education institution:

1. Go to Federal > Deductions & Credits > Education > Expenses and Scholarships (Form 1098-T)
2. Click Edit on the School. Make sure the tuition in Box 1 is correct. Do not include the distribution in any box.

If this does not remove the income from your MA return, please clarify if the income is also on your federal return or is entered as an adjustment to derive your MA. TurboTax may make a portion of your 1099-Q taxable to maximize any education credits you may be eligible for, but that would be at most $10,000 of the distribution, and you are only taxed on the earnings portion of that $10,000. 

[sg11sg]

Thanks, I checked everything you mention, and yet that did not change the MA tax. So I deleted all my 1098-T and 1099-Q entries, and the MA tax did not budge by the 5% that it went up by. Will try carefully entering the 1098 and 1099-Q again.

[sg11sg]

I checked it again. I had a backup tax file from a couple of days ago. I used that to input my 1098-T and 1098-Q. After completing my federal taxes, and moving to the state portion, the tax owed was $576. Once I went through the MA education section (college tuition), it said I don't qualify for the education credit, and bumped my taxe owed to $3,511. It's as if the MA section assumed that I was eligible for the education credit, and once I answered the questions on the college tuition, it removed the credits: "You are not eligible ... tuition does not exceed 25% of your Massachusetts adjusted gross income". 

I checked my 1040 for the various incomes/capital gains, and don't see the tuition portion added there.

[RaifH · Accepted solution]

It seems as if it is not your 1099-Q distribution that is being taxed. Instead, TurboTax is saying you are not eligible for the Massachusetts college tuition deduction.

The deduction does not apply to graduate degrees. It also only kicks in if your tuition expense is greater than 25% of your Massachusetts adjusted gross income for the year. It looks like the system may have originally been applying this credit to your return but upon realizing that your AGI was too large, it disqualified you and added the tuition paid back to your Massachusetts income. 

If you pull up your old return and look at Massachusetts Schedule Y Line 11, it may be applying the tuition deduction there. Once you go through the education interview, that number would 0 out and the adjustment to your income for Massachusetts would disappear. 

[sg11sg]

I pulled up the older dated return where I had not yet gotten to the state tax section, and looked at Massachusetts Schedule Y Line 11, and it does indeed show the entire tuition amount on line 11. So it looks like Turbotax is doing the right thing in terms of not giving me any deduction and hence the tax due is higher.

Thanks!