Why is TT taxing qualified 529 distributions?

[NCperson]

in the last hour tonight (January 22, 11 p.m. ET) , there was another push from TT, I don't see the error anymore. 

line 2D in Section VIII automatically filled (the left column)

[aaciii]

Are you using the online or desktop??  I don’t see any updates tonight. (Desktop).

[NCperson]

desktop

version 2019.41.14.207

[gtd1234]

I have run into exactly the same issue as OP for the last several years.  Unfortunately, TT refuses to fix this problem. 

The problem is made worse by some by some people here commenting who do not understand the tax law related to 529s.  In another thread, someone says with great authority that if your income is too high to get the education credits, you are not eligible to make qualified withdrawals from your 529 without being taxed; this is false, which is easily seen by looking at the IRS documentation on 529s.

I also cannot get to the screen that would allow me to replace a 10,000 entry with a 0, which seems to have helped some people.  I do not have a "here's your education summary" screen.  I have gone through the interview portion on education five times already; no change.

The only way to avoid it that I have found is to not type in the 1099-Q at all; the IRS does not require it to be included.  Not including the 1099-Q info in TT does however expose you to correspondence from the IRS; I received a CP2000 letter on 529 distributions, demanding tax; I replied that my child was in college and the distributions were for qualified expenses, which I listed, although I did not provide receipts.  I later received a notice saying I was in the clear. 

If TT would allow us to enter the 529 info correctly, this could all be avoided.

[Hal_Al]

 "Not including the 1099-Q info in TT does however expose you to correspondence from the IRS".  

That's not so.  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." 

I, too, received a CP2000 letter on 529 distributions, demanding tax.  And, I had correctly entered everything into TT.   I responded with school billing statements and it all went away. .  It's interesting to hear that you didn't provide em anything. That's good info to share with the many people, here, having this concern. 

I'm convinced the IRS needs a form (similar to 8363 and 8815) for this situation.  Then TT would be forced to fill it out!

[gtd1234]

Okay, I guess it would have been more accurate to say not entering the 1099-Q info exposed _me_ to IRS correspondence two years ago.  I should not have made the statement general.

But despite entering expenses in the interview process, TT still reports expenses as "0" on the expenses and scholarships line for me.  I assume this is because of the 10,000 entry on a credit screen that I cannot get to (although others clearly can, probably with different circumstances).

I agree that TT needs a form for those that have qualified 529 distributions but are not eligible for education credits to get all this on the record.

[VuN]

All distribution (Box 1 of the 1099Q) went to a qualified educational expense (college tuition), but why am I still getting taxed on the 529 earnings? How do I designate that all distribution went towards a QEE and have TT prepare the worksheet for record keeping?

[Hal_Al]

@VuN 

You have improperly entered the expenses, so they are not offsetting the  box 1 distribution.  It could be that you are claiming a tuition credit, which means some of the tuition is no longer available to be applied to the 1099-Q.  That would make some of the earnings (but usually not all) taxable.

If you know that you have enough expenses, just don't enter the 1099-Q (or delete it if you have entered it). 

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." 

[Trumbull]

I am getting tripped up because the TurboTax site has conflicting info.  It says report it on student's return but then says if student is dependent then report on parent return.  I entered it on the parent return which then told me the student has a taxable amount.  So, then do I enter it a second time on the student return?  It sounds like I need to keep enough expenses off the parent return to offset the student return 1099-Q amounts.  

TT site I looked at was:  https://ttlc.intuit.com/community/entering-importing/help/where-do-i-enter-a-1099-q/00/26766

and it reads as follows:

The 1099-Q is reported on the recipient's tax return (the person whose Social Security number is on the form). If the funds went directly to the school, consider the student as the recipient, and if the student is your dependent, you should enter the 1099-Q on your return.

[Hal_Al]

"The 1099-Q is reported on the recipient's tax return (the person whose Social Security number is on the form). If the funds went directly to the school, consider the student as the recipient, and if the student is your dependent, you should enter the 1099-Q on your return."

The part in bold is wrong. 

[malonela]

I know this is a relatively old thread, but I continue to deal with this exact issue every year for the past 8 years, with both of my children going through college.  Every year, I notice that I appear to be paying a penalty for withdrawing more money from my 529 plan than the qualified expenses.  But I know that is not the case.  I am very careful about matching my withdrawals to the expenses.  There is no automated way to correct this issue in EasyStep.  Every year, I have to go to the Student Info Worksheet and remove the $10,000 "used for credit".  I am not qualified for any of the credits (income limitations) so I have $0 used for credit.  TT really needs to get this corrected in EasyStep.  It tells me I'm not eligible for the credits but keeps saying I'm using $10,000 for a credit.  I should not have to hunt around in forms for the obscure field on a worksheet causing the problem.

[Hal_Al]

@malonela  Yep, they need to do a better job.  But, we've been unable to convince them. That appears to be that sometimes it works right. 

In the education interview, you should reach a screen titled "Choosing a larger education Credit". Verify that TT has entered $10,000 (the amount needed to get the maximum LLC) in the box on that page (you can change it, if needed). 

Sometimes TurboTax will  present you with a screen  titled “Amount Used to Calculate Education Deduction or Credit” You have to know to change that amount (there is an explanation  and instructions on that page).  It's possible to get back to this screen.  

PLAN C is to do what you've been doing.  On the Student Information Worksheet (abbreviated Student Info Wk on the forms list), go to part VI and change line 17 (“Used for credit”) to 4000. Make the change in the first column.  That will automatically change the other columns.

[SuziM]

Thank you for reaching out and sharing your experience.  We would like to investigate this issue further.  If you’re willing, we would like to ask if you could provide a Diagnostic File of your return.  This copy will be purged of all personally identifiable information.  If you are willing, please follow the instructions provided below to get us the information we need. 

• TurboTax Online​   

1.  Sign-in to your online account. ​ 
2. Click on “Tax Tools” to the left-hand side of the screen. ​ 
3. A drop-down will appear. Click on “Share My File With Agent”. ​ 
4. This will generate a message that a diagnostic copy will be created. Click “OK”.  The tax file will then be sanitized and sent to us. This action will generate a Token Number  
5. Please respond directly to this message and provide the Token Number that was generated.  

• TurboTax Desktop​ 

1. Open your return. ​ 
2. Click “Online” and select "Send Tax File to Agent". ​ 
3. This will generate a message that a diagnostic copy will be created. Click “OK”. The tax file will then be sanitized and sent to us. This action will generate a Token Number  
4. Please respond directly to this message and provide the Token Number that was generated.  

[rocketron66]

SuziM,

I found the problem with TT's calculation of the 529 total qualified expenses (section VI line 13). in the 529 column on the student info worksheet. The values for expenses below the tuition (line 1) are listed as negative numbers. So, they are being subtracted from the tuition. In my case, the books (line 4) and room and board (line 6) are being subtracted from the tuition. They are qualified expenses and should be added to the tuition. I don't have values in lines 2, 3, 5, 7 and 8, so I don't know if they are also incorrect. 

[Hal_Al]

@SuziM  See reply above