Splitting 1098-T Expenses between 529 Account Holder (to Offset 1099-Q) and Beneficiary (for LLC) ?

[Austin1818]

Hi all. Here is a rundown of the situation I need help with. Can't make sense of it myself and I'm getting conflicting opinions from the tax pros / people involved.

My wife attended school this year, and received a 1098-T with $17,000 of qualified educational expenses. $13,000 of these were covered by 529 withdrawals made by my mother-in-law (MIL). My wife was the beneficiary of the 529, but my MIL was the account holder. There was a 1099-Q issued to my MIL and her SSN reporting the $13,000. My wife and I are filing jointly, and she is not able to be claimed as a dependent on my MIL's return.

I would very much like to claim the $4,000 of expenses that weren't covered by the 529 withdrawals for my wife's Lifetime Learning Credit. Can I do that? Who files the 1099-Q? Who files the 1098-T? My assumption is that my MIL could file the 1099-Q and 1098-T to show the withdrawal was covered by qualified expenses, and that my wife and I would file the 1098-T and just claim the $4,000 as qualified for the credit - this avoids all 'double dipping.' My tax pro is saying there can be no splitting of the full amount, and either my MIL or my wife must file both the 1098-T and 1099-Q (and that it should be my wife).

Any help is very much appreciated. Thank you in advance.

[KrisD15]

Both are correct. 

You will claim the 4,000 for a credit. 

Your Mother-in-law pays no tax on the distribution since it was used for education expenses. 

HOW IT IS SUPPOSED TO WORK-

Student is beneficiary, student makes distribution, student receives 1099-Q and 1098-T. 

     If student is dependent, person claiming student gets a credit if expenses are more than assistance and student pays the tax if expenses are less.

     If student is not dependent, student gets a credit if expenses are more than assistance and student pays the tax if expenses are less. 

Since the student is not a dependent, and since the account owner (not the student) took the distribution, the person issued the 1099-Q needs to co-ordinate with the student so that the student lowers the amount of expenses they claim for an education credit. 

1099-Q and 1098-T are INFORMATIONAL forms. The IRS does get copies, but they are not LISTED on a return. The numbers are used to calculate a credit and/or taxable income. 

In TurboTax, and in your situation, your mother-in-law may simply not enter the 1099-Q, or enter the 1099-Q and select the option that it was used for education purposes for someone not listed as a dependent. The program will tell her that it isn't taxable and that will be the end of it. 

In TurboTax, you (filing with the student) must lower the amount in Box 1 by the amount of the distribution, OR enter the 1098-T as is, and then report the distribution as additional aid received.

Either way, the numbers come out the same. Mother-in-law has no tax on the distribution and you use the lower expense amount towards a credit. 

Transferring funds to the school directly will result in the student getting the 1099-Q which is how it should work and makes tax filing so much easier. 

IRS Pub 970 explains in detail. 

[Hal_Al]

Room and board are also qualifying expenses for a 529 distribution, if the student was half time or more. MIL can claim it, even if the student lives at home with her spouse. But you are limited to the lesser of your actual costs or the school's "allowance for cost for attendance" (basically what on campus students pay for Room & Board).

To get the maximum  Lifetime Learning Credit (LLC), you need to claim $10,000 of educational expenses.  Books and a computer are eligible expenses for the 529 distribution, but not the LLC. 

As the other reply said, you need to coordinate with MIL to allocate expenses for the best benefit to the family.  If MIL may have to pay a little tax, on the distribution, but there will be no penalty (claiming a tax credit, for the same expense, is a penalty exception. 

After deciding how to allocate expenses, reply back if you need help entering in TT.  There are simple workarounds available.