How do I force 529 expenses to non-qualified in order to qualify for American Opportunity Credit?

[nyarrow]

In 2020, I withdrew money from a 529 plan to cover qualified Educational expenses. When filing my 2020 taxes, I realized that I need to treat part of the 529 withdrawal as non-Qualified in order to take the American Opportunity Credit.

How do I make this adjustment in TurboTax? I have been unable to locate a method in the questionnaire (and I've gone as far as completing the "Federal Review"), and I the forms do not seem to accept direct edits.

Thank you!

[AmyC]

First, if all of the 529 went to qualified education expenses plus room and board, you can delete the form 1099-Q.

Second, determine how much went to AOTC expenses versus room and board.

Room and board is not a qualified expense for AOTC, but it is a qualified expense for the 529. For full details, see 529 for Room and Board. Did all of it go to room and board? 

• Yes - delete the 1099-Q and concentrate on the AOTC
• No but all of it went to qualified expenses: delete the 1099-Q and subtract the portion paid to qualified expenses from the qualified expenses.
• No - the 529 was bigger than all of the above expenses. The amount beyond room, board, tuition, books, etc is taxable. This is not common and it sounds like you know you have some money paid to qualify for the AOTC.

Example of no- but went to qualified expenses:

• $15,000 529 distribution. $12,000 went to room and board with $3,000 towards tuition, books, etc.
• 1098T shows $12,000 tuition. Plus you have additional expenses of $1,000 for books and miscellaneous.
• The 529 paid $3,000 towards the tuition and books. If we subtract the $3,000 from the amount paid for tuition and books, we have $13,000- $3,000 = $10,000 actually spent out of pocket.
• Any amount over $4,000 for tuition expenses paid out of pocket is extra, not needed for calculating the AOTC.*
• In this case, the 529 does not affect your AOTC. Delete the 1099-Q.

*The AOTC is worth up to $2,500 per student for the first $4,000 you spend on qualifying educational expenses on behalf of you, your spouse, or your dependents. 

[nyarrow]

Thank you - but this doesn't quite match my scenario.

I had approx. $9k in qualified expenses.

I withdrew $9k from 529 plan to pay for these expenses. If I claim all of this as a qualified withdrawal, I do not qualify for the American Opportunity Credit.

I identified that I would be better off if I instead:

- Kept $5k of $9k 529 withdrawal as qualified 529 expenses.

- Treat $4k of $9k 529 as a non-qualified withdrawal (paying taxes and penalty on the gains)

- Apply the remaining $4k of expenses to qualify for the maximum American Opportunity Credit

It looks like this approach will save me about $2,400 in taxes.

As I read the IRS instructions, this seems to be a valid option (they even have a withdrawal code specific to this scenario). However, I can not figure out how to make TurboTax treat the $4k as a non-qualified expense. By default, Turbotax matches up the $9k in 529 withdrawals with $9k in expenses and indicates that I do not have qualifying expenses for the American Opportunity Credit, and therefore zeros it out. 

[Hal_Al]

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use ($4000) or change it.  You may reach that screen sooner.

Room and board, as well as books and computers are also qualified expenses for the 529 distribution. Be sure to enter them too.  You may claim board (but not room) even if the student lives at home. 

[AmyC]

The program vs tax forms. At the end of the day, after room and board and tuition expenses are taken, you want to claim $4k as income and $4k as college expenses. As long as the bottom line is correct, the taxes and the credits, that is the goal.

You could delete the  1099-Q from it's official location and instead input the $4k under miscellaneous income with a description of 1099-Q.

[nyarrow]

This is getting me closer - but not all the way there.

As I understand it, only the portion of the $4k that was gains should be included in income (since money going into 529 plans is post-tax). Let's say the fraction of gains associated with the $4k is $200. I can cover that with your approach (mark it as income on a separate line item), but I also need to cover the 10% penalty (e.g. a $20 penalty). I'm not sure how to add $20 straight to the taxes due...

[nyarrow]

@Hal_Al 

Thanks for this - I think this worked in 2019, but at least in 2020 Premiere for Mac this doesn't navigate to a screen with "Amount Used to Calculate Education Deduction or Credit". Is there some other way to navigate to this box?

I would much rather use the correct box than hack in numbers per the other response...

[Hal_Al]

You won't have a penalty  because the reason  some of the distribution is taxable is only because you diverted qualified expenses to the tuition credit.  That is a penalty exception.  

Technically, when you have a penalty exception, you are suppose to submit form 5329.  TT will not generate that, if you do not enter the 1099-Q and the ed expenses.

[Hal_Al · Accepted solution]

Sorry, not familiar with mac.

But since you're using desktop software, you should be able to enter it directly on line 17 of the Student Information worksheet.

I've heard others say you may need to delete the 1099-Q and 1099-T and start over to generate that screen.  Re-enter the 1099-Q first