Why is TT taxing qualified 529 distributions?

[RichInPitt]

I withdrew an amount from my daughter's 529 in the amount of her expenses for the year, all in the same calendar year.

TT is taxing me on a portion of it.

The TT Form 1099Q has two columns for Computation of Taxable Distribution - one for Regular Tax and one for 10% Additional Tax.  The 10% Additional Tax column has Line 1, distribution, and Line 2b/c Qualified Higher Education Expenses, as the same, correct number, so no 10% excess tax.

But the Regular Tax Column has a number $10,000 lower for the 2b/c Qualified Higher Education Expenses amount, so line 3, Excess Contribution, is 10,000.  It then calculates the percentage that is earnings, etc., and comes up with $4,000+ that is taxable.

Why is 10,000 of expenses excluded?  I checked the 1099Q and 1099T forms many times, and they all have the same numbers that match.

I saw this from last year - https://ttlc.intuit.com/community/retirement/discussion/withdrew-money-for-son-s-undergrad-ed-expens... - but I see nowhere to define any amount to be used for a tax credit (for which we don't qualify).  The path suggested in that answer doesn't exist in TT2019.

I also found a similar problem "solved" last year - https://ttlc.intuit.com/community/college-education/discussion/why-would-529-earnings-be-taxed-if-qu... but the URL to what appear to be an Intuit support explanation/fix is no longer valid ("TurboTax Support has moved")

[Hal_Al]

TurboTax assumes you will claim a Tuition credit, if you are eligible. So it reduces the amount used for the earnings exclusion, on the 1099-Q, for the amount used for the credit. You are not allowed to double dip.

Since the tuition credit is more generous than the earnings exclusion, that is the best way to file.

If you some reason, you are not eligible for the tuition credit, or do not want to claim it;

Go through the education section again. When you get to the screen that says “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 or change it.

Enter $4000 if you are claiming the American Opportunity Credit or $10,000 for the Lifetime Learning credit. Change it to 0, if you want it all applied to the 1099-Q.

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.

[Hal_Al]

More on 529 plans:

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. 
Example:
  $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

60%x600= $360

You have $240 of taxable income (600-360)

[NCperson]

remember that the 1099-Q is filed on the tax return of the SS# on the form. 

If the 529 money went directly to the college (or the student), the student's SS# will be on the form and the student should report it. 

If the 529 money was distributed to the parent, then the parent's SS# will be on the form and the parent will need to report it.  

for some reason this trips a lot of people up. 

[Carl]

for some reason this trips a lot of people up.

Another thing that many folks don't understand, is that all scholarships, grants and 529 distributions are treated as taxable income "initially". Their taxability is then offset by the qualified expenses they are used to pay for. This is because monies not used for qualified or allowed expenses, are taxable income.

[NCperson]

and in @Hal_Al 's example,  this is why it's best to pay the money from the 529 directly to the college...because any taxable earnings end up on the student's tax return and it's unlikely (but possible) that the student owes any taxes because their earnings are typically low. 

[RichInPitt]

"Go through the education section again. When you get to the screen that says “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 or change it."

This is the guidance I was referring to in my first link.  I can get to a "Here's Your Education Summary" page, but it just lists Tuition, Other Expenses, etc - nothing about going through an interview.  I've clicked every Edit button, and deleted/re-entered tuition/1098-T data, and have come across nothing about using expenses for credit.

At the very beginning, I get "You can't claim tuition and other fees" which says I should Continue "to avoid paying tax on your ... qualified tuition program (QTP)", but that seems to be exactly what it causes.

Jump to letme just gives "This topic doesn't apply to you because you don't have any qualified education expenses in your tax return", even though there are.  On the "Your 1099 Deductions and Credits", my entered 1099-Q data appears, but the line for "Expenses and Scholarships" shows $0.  I can go into the details to where it asks whether I've received a 1098-T, answer yes, and all the correct cost data is there.

To simplify things and answer some questions:

- we are not eligible for any of the credits - income limitations

- we received no scholarships to offset the costs.  This is a simple "school billed us full cost, we paid full cost"

- 1099-Q is in my name - distributions to me, and I paid the school (reasons aren't really relevant).

- All payments were in the same calendar year as the costs.

[RichInPitt]

"Go through the education section again. When you get to the screen that says “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 or change it."

This is the guidance I was referring to in my first link.  I can get to a "Here's Your Education Summary" page, but it just lists Tuition, Other Expenses, etc - nothing about going through an interview.  I've clicked every Edit button, and deleted/re-entered tuition/1098-T data, and have come across nothing about using expenses for credit.

At the very beginning, I get "You can't claim tuition and other fees" which says I should Continue "to avoid paying tax on your ... qualified tuition program (QTP)", but that seems to be exactly what it causes.

Jump to letme just gives "This topic doesn't apply to you because you don't have any qualified education expenses in your tax return", even though there are.  On the "Your 1099 Deductions and Credits", my entered 1099-Q data appears, but the line for "Expenses and Scholarships" shows $0.  I can go into the details to where it asks whether I've received a 1098-T, answer yes, and all the correct cost data is there.

To simplify things and answer some questions:

- we are not eligible for any of the credits - income limitations

- we received no scholarships to offset the costs.  This is a simple "school billed us full cost, we paid full cost"

- 1099-Q is in my name - distributions to me, and I paid the school (reasons aren't really relevant).

- All payments were in the same calendar year as the costs.

[Hal_Al]

Beware of the "kiddie tax".  A taxable 529 plan is considered investment income. So, sending the money to the beneficiary, instead of the owner (parent) doesn't always result in the lower tax rate.

[NCperson]

line 2d of section VIII - that is an input cell .... assuming you are not taking the AOC credit, it appears this should be the same amount in both columns.  just type it in. that should eliminate the regular tax and the penalty. 

I was able to replicate what you were stating in your thread.  HOWEVER,  I did note that the form is not complete for filing purposes (using the desktop version and the red exclamation point is evident) and the tax law changes effected in late December are not reflected in the form yet.  

So it is possible that your issue related to the forms not being completed yet. 

note @Hal_Al 's advise earlier (really the same as I state): 

If you some reason, you are not eligible for the tuition credit, or do not want to claim it;

Go through the education section again. When you get to the screen that says “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 or change it.

[RichInPitt]

"note @Hal_Al 's advise earlier (really the same as I state): "

Yes, I noted it. And in my reply I noted that it doesn't work.  I described all of the buttons available to me on tha screen and none of them take me to anything like what is described.

When I get to "Here's Your Education Summary", click on "Education Information",  I'm asked about degree (yes, was working on ...), Enrollment status (Full time), No, didn't earn 4 years already, No, not first year, No, never received either credit before, No, no drug conviction, and I'm back to "Here's your education summary".  There is no screen titled "Amount Used to Calculate Education Deduction or Credit".

How else do I get to this screen?

"line 2d of section VIII - that is an input cell .... assuming you are not taking the AOC credit, it appears this should be the same amount in both columns. just type it in. that should eliminate the regular tax and the penalty. "

line 2d of section VIII of what?  I can't find anything like this.  My problem appears on the TT 1099-Q form, QTP Computation of Taxable Distribution - line 2b, "Adjusted Qualified HE Expense applied" is 10K less in the "For Purposes of Regular Tax" column than it is in the "For Purposes of 10% Additional Tax" column. I see no reason for them to be different.

[NCperson]

go to Forms View and look at the "student info worksheet"- section VIII...in the forms list , it's indented under your child's / dependent worksheet 

and again, the issue may be that the late December tax law changes may be holding up the calculations in TT

might be best to wait until January 27th to see if it simply clears itself up.  

[RichInPitt]

Thanks, I found it.  That's the same set of data/columns I noted above.  I can just type over it, but that kinda defeats the purpose of automated tax software - I assume it won't automatically update the numbers if I find more expense on another pass through and it's now effective manually filling out the education section.

I'd still like to find how I get to the sections mentioned above where I select what credits I want to take/maximize my education deduction.  This sounds like the root cause of the problem but, as noted, I don't see the screens/buttons others are referencing.  Anyone know how to go back and change this selection - surely it's not a one-chance-only choice in the software.

My education-related forms are no longer showing a red exclamation point.  I can wait until the AMT/HSA/Foreign Tax Credit forms that are shown as being updated in the future (date keeps being pushed back) are done, though I don't see why these would effect an educational expense.

Anyone know how to get to the " screen titled “Amount Used to Calculate Education Deduction or Credit”",  so I can "verify the amount you want to use or change it."?

[NCperson]

there is another thread going on this same issue....I am leaning towards it's a bug as either I am doing something wrong also (I can't get it to work property either) or TT is not behaving correctly ...... give it a few days and we'll see what surfaces on the other thread.... the issue to me is why line 2d in the left column in section VIII is not automatically populating; line 2d in the right column does automatically populate correctly. 

@Hal_Al is awaiting a 1099-Q 'for real' and he promises to report back in a few days, 

[aaciii]

Same issue here.   Income too high to qualify for anything; TurboTax is taxing a portion of the 529 distribution when it shouldn't be, becuase of incorrect calcs in section VIII (line item 2d) of the student worksheet.

[aaciii]

whats the other thread (can you please provide a link)