1098T and 1099-Q

[72JLtax]

I need help with the best way to enter these in Turbo Tax.  I have a 1098T and 1099-Q both issued in the child's SSN. The 1099-Q and 1098-T list the same amount that was directly transferred from the 529 plan to the school.  The school expense includes room and board. The school issued a refund of some of the payment, but the 1098-T was not updated and shows what they received from the plan. Should it be updated? On whose returns should these forms be entered? How is the refund handled? There was also an additional $2000 in school related expenses and about $3500 in gain on the 1099-Q. How such this be reported? Thanks

[SharonD007]

The 1099-Q should be reported on the tax return of the person whose SSN is on the form (your child) and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.

You can avoid paying taxes on the refund received from funds that were paid from the 1099-Q withdrawal if the refund is recontributed within 60 days. If you did not recontribute those funds, you still may not have to pay taxes on the refund because you stated that your child incurred additional education expenses. 

To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the amount that was refunded. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it.  If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your child’s tax return as ordinary income and they will pay an additional 10% penalty tax as well on that amount.  TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.

You can report the 1098-T on your tax return if your child qualifies as your dependent. You may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.

Please see the TurboTax articles Guide to Tax Form 1098-T: Tuition Statement and What Are Education Tax Credits? For additional information.

If your child files a tax return, make sure they check the box indicating that someone else will claim her as a dependent.

[Carl]

Read the below through, three times.

- The first time, read everything.

- The second time, draw a line through that which does not apply to your situation.

- The third time, on read that which is not lined through.

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

Now there are two separate determinations to be made here.

• Who claims the student as a dependent.
• Who reports all the education expenses and claims all the education credits.

First, who claims the student as a dependent?

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for any one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”.  To reiterate:

If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.

Who reports all the education expenses and claims all the credits?

If (and only if) the parents qualify to claim the student as a dependent, *and* the parents actually are claiming the student as a dependent, then:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option even f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Here’s when the parents will claim the student as a dependent, but the parents will NOT claim any of the education expenses or report the 1098-T on the parent’s tax return.

.If the amount of scholarships/grants/529 funds exceeds the amount of qualified education expenses,  then the student will report the education stuff on the student’s tax return. The parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s investment income exceeds $1,050 or if the student’s earned income when added to the excess scholarships/grants does NOT exceed $12,350 for the 2019 tax year, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $12,350, then the student should file a tax return so as to get those withheld taxes refunded.

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included on line 8z of the SCH 1 which gets transferred to line 8 of the 1040.

Finally, out of pocket money is applied to qualified education expenses

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.