Why is TT including 529 distribution (earnings only) as taxable in 2020 taxes when it was used for educational expenses?
I asked for help from support and they can't answer why. They say it was entered correctly. I think TT is working incorrectly.
Expenses that would taxed on a 529 plan are:
- College application and testing fees
- Transportation expenses
- Health insurance
- Extracurricular activities
Expenses used to generate federal education tax credits, such as the AOTC or the LLTC
Money withdrawn in excess of qualifying expenses or any expense that is not considered a qualified education expense will incur taxes.
If you pay expenses with 529 plans, you cannot claim a tuition deduction. You cannot claim the American Opportunity Tax Credit or the Lifetime Learning Tax Credit for the same expenses.
I have the same issue and and same question.
The full amount of 529 distribution was used to pay for my daughter's college tuition, which is qualified education expenses.
We are not claiming her as dependent this year. When she adds the 1099-Q to the return, TT shows the earning portion shows in box 2 is taxable. She received and add the 1098-T showing the tuition payment to college.
I checked our return last year when we claimed her as dependent, the earning is not taxable.
There were some posts in previous year suggesting not to report/delete the 1099-Q if the full distribution amount was used for qualified education expenses.
I just wanted to check again so we can understand why earnings show as taxable on my daughter 2020 tax and just wanted to make sure the return is filed correctly.
Thank you for your help.
Box 2 in Form 1099-Q represents earnings. Here is a link to information on the IRS website. Earnings are things that are outside of tuition, books, and school essentials. Usually that would be something like room and board / rent, and living expenses. This is because books and tuition are considered necessary for education; living expenses and food is something everyone needs regardless of whether they are receiving a college education or not. Those items are considered "income" for federal tax purposes, and are taxable as such. Books, tuition and the like are not.
Here is a TurboTax article with guidance regarding Form 1099-Q.
In my specific situation, on 1098-T, Box 1 (Payments received) =$7805, Box 5 (Scholarships) = $3000.
We paid $4000 from personal savings (to take advantage of the American Opportunity Tax Credit).
We paid $400 dollars from 529 plan. On the 1099-Q, Box 1 (Gross distribution) = $400, Box 2 (Earnings) = $55 and Box 3 (Basis) = $345.
We entered the information with assistance from 2 people from TurboTax call center watching online. They confirmed everything was entered correctly, yet the TT tax return showed $55 in income on line 8. It was not (and still isn't) clear why TT would have included that as taxable.
The Call Center people (who were very polite and professional) said I would have to pay for tax advice option to get an answer. When I asked if I would get a refund if it turned out to be a TT issue, they clearly state that I would not.
Later, I reached out to some parents (locally) and one of them was able to show we a way to address this.
I still think there is a bug in TT for my specific situation. I was surprised and disappointed that the TT call center person didn't seem to be concerned by that.
In your case, the 1099-Q is a low amount that clearly covered some food costs, not used for tuition. You can delete the Q completely. It is not necessary in your taxes. The Q distribution to cover room and board is not taxable and should not be included.
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