1098T and 1099Q for graduate student

[confusedrf]

Here is the situation. My daughter is in graduate school. She attends part time has an internship and a part time job where she made 37k last year. She lived  at home and it's twenty three years old and is no longer considered a dependent on mybtax return...which excludes me from the lifetime learning credit. 

I was advised not even to enter her 1099Q and T on HER form based on some things I read in another forum topic.  But for the heck of it I input them.

Prior to input she was getting back almost a thousand dollars refund - federal. At first prompted me to enter the 1099Q information. It essentially showed 15k in box one gross distribution 3k in earnings and 12k as the basis. It then prompted me for the 1098T information which shows in box one payments receive for qualified tuition 15K. Somehow turbotax reduced her federal refund almost four hundred dollars and the state went up too.

My understanding is 529 plans grow tax-free so long as I'm using them for qualified tuition ... and there should be no taxable consequence. So why the heck is turbo tax somehow calculating a taxable consequence?

Now I'm at a loss as to whether I need to input this or not. Or what is going on.

[SusanY1]

Can you clarify for us if there was anything in Box 5 (scholarships/grants) on your daughter's 1098-T?  

[confusedrf]

Nothing in box 5.

It gets even weirder. I went back and had it walk me through everything on the education area. And this time a new section popped up, which asked some questions about her school and status... if she ever had , any credits before..... I answered no she had not got credits before on her tax return. FYI..I have gotten one form of credit or another for the past 4-5 years but this she does not meet the dependent criteria...so the q/t do not appear on my return for the first time.

A screen popped up suggesting to allocate 10k of what should be non-taxable 529 distributions as taxable in order to get a lifetime learning credit.

So we went from about nine hundred dollars and change before entering any of the t or q information.... To that being reduced to six hundred dollars and change after entering the t and q even though they should be tax free distributions.... To her now getting a twenty six hundred dollar refund with the lifetime learning credit.

I think it's somehow implying that the distribution should be tax-free because it's from a five twenty nine plan , but if instead , she pays taxes on that 10k she might get a better credit with the lifetime learning.

I don't really understand all. This somehow feels like a double dip to me but i'm not sure. Further, when I did the state review for Pennsylvania... It asked questions and prompted me and I entered. She had 15K in education expenses and A15K distribution. And that lowered her taxable income back down to the seventeen dollars she originally owed.

Very confusing... Her tuition was paid with money that grew tax-free from a 529 plan. But somehow turbotax calculates her paying tax on it and gives her an extra two thousand back?  The numbers don't seem to make sense though. If a refund was $600 before the 10000 she must now pay tax for the 10000. I would think that would lower the refund from six hundred dollars 20 or less than zero so How could the refund jump up to twenty six hundred dollars.

Ugh.

[AmyC]

The 1099-Q should not be entered for two reasons. One, the IRS does not want you to, IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

Two, the program holds apart $10,000 for LLC as hostage to manipulate calculations based on the taxable 1099-Q income.

Delete the 1099-Q so the IRS and program can function effectively. As an adult, claiming her own exemption in graduate school, she may qualify for the LLC.

The $15,000 of 1099-Q largely went to room and board. The 1098-T of $15,000 minus the little bit left of the Q after room and board leaves room to claim the LLC and probably get the full amount of her tax liability up to $2,000 covered.

Remember, living at home does not mean there is no room and board. Use the off-campus guide provided by her college to determine the allowable costs for living off campus. See 529 for Room and Board.

[confusedrf]

Okay I am still a little confused. If I completely delete the q and t form from my daughter's tax return , she'll get nine hundred dollars and change refunded.

If I add the q and t form to her tax, return ....at least temporarily for whatever reason, perhaps that hold back you were talking about... it reduces her refund to 6 hundred dollars even though it really should not... 

If I revisit the education area something pops up at the bottom where I enter some more facts about her education. I. E she's in graduate school. She's a 1/2 time student etc et cetera. And eventually a screen pops up which seems to suggest. I should enter an amount between zero and ten thousand dollars. If I enter zero there her refund goes back up to 9 hundred dollars. I guess this is the equivalent of not entering  the q /t at all.

If I however kett in  the box ten thousand dollars suddenly her refund is twenty six hundred dollars. Is this because turbotax is somehow taking the $15000 that was tax-free from my 529 plan and having her pay tax on 10000 of it. Thus somehow earning the two thousand dollar credit?

Is there any reason Not to do this.  It feels wrong somehow.

[KrisD15]

No reason to not do it.

The IRS shows examples of how to max-out education credits in Pub 970. 

With no regard to education, the student is getting 900.

You next enter the 1099-Q, which triggers taxable income.

next is the 1098-T resulting in her refund going down to 600. 

The program stalls a bit after the 1098-T is entered since the education interview is not yet completed.

Next, the program is trying to figure an education credit. 

There are situations where it may be more advantageous to claim a credit using expenses that were paid for with a 529 (1099-Q) distribution, although that might make the distribution taxable income. 

Sometimes the credit is worth more than the tax. 

Since she finish her first four years prior to 2023 (and may have already used the QOTC four times) the only credit she might be eligible for would be the Lifetime Learning. It is a less valuable credit and maxes out with 10,000 expenses.

Once you continue the education interview and allocate expenses for a credit, the credit increases her refund to 2,600.

According to the IRS Pub 970 page 46

"The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits. This means the beneficiary must reduce qualified higher education expenses (QHEE) by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. 

Example. In 2023, during your first year in college you had $5,800 of QHEE. You paid your college expenses from the following sources. 

Partial tuition scholarship (tax free) ......... $1,500 

Coverdell ESA distribution ............... 1,000 

Gift from parents ...................... 2,100 

Earnings from part-time job ............... 1,200 

Of the $5,800 of QHEE, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Your parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Before you can determine the taxable portion of your Coverdell ESA distribution, you must reduce your total QHEE."

[confusedrf]

I think you are saying somehow the software prompts me for a dollar amount to which I put in 10 thousand dollars. And it then increases her taxable income by $10000. Yet at the same time, that qualifies her for an additional $2000 Lifetime learning credit.

It seems odd and feels weird but if she is entitled to it and I guess I should do it.

Now, when I do my PA state tax must this also be considered taxable income there. Or can I rather say that she had 15K and education expenses? And I used her 529 plan to pay those expenses thus there's no taxable income for pennsylvania state.... Does that make sense?

[confusedrf]

See above post...please comment. What is confusing...assuming I can do everything in the above post....when I put in 10,000..what additional revenue gets taxed? 10k or just the 3 k in earnings shown on the Q from the 529 plan.  It feels like it's trying to award 2k credit if I show 10K out of pocket for the year...the out of pocket can not include anything that grew tax free over tim in the 529 plan?  And of the 15 k distribution I think the q form is saying I put 12k basis in of my money that grew by 3k earnings.....?

[Hal_Al]

This is a duplicate post.

https://ttlc.intuit.com/community/taxes/discussion/lifetime-learning-credit/00/3199011

It's clear that the student comes out better claiming the LLC and paying a little tax on the 1099-Q (I assume the 1099-Q is in her name, but the answer is the same even if the 1099-Q is in the parent/owner's name). It's just a matter of whose return the 1099-Q (and small amount of taxable income) goes on. 

 Also, as others  have said, some room and board needs to be allocated to the 529 distribution, since the student is half time or more. 

The problem appears to be in the complexity of the TurboTax interview. There is a workaround.  Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses (tuition and R&B). Press Done at the 1099-Q summary screen, to get there.  Enter the amount (most likely the full $10K needed) used to claim the LLC as "tax free assistance".  

Claim the LLC, by entering the 1098-T, without adjustments, in the educational expenses and scholarship section.

Rough estimate: An additional $1000 of income (line 8z of Schedule 1) resulting in $120 of tax vs. a $2000 LLC.

[Hal_Al]

I've edited the above. Enter the amount (most likely the full $10K needed) used to claim the LLC as "tax free assistance", not "other adjustments".  The taxable amount does not change, but the 10% penalty is removed. Claiming a tuition credit with the same 529 money, is a penalty exception.  

[confusedrf]

This should not be this complicated.  I don't understand why everyone keeps saying to enter room and board. 

Am I interpretting the q form correctly. It essentially shows 15k in box one gross distribution 3k in earnings and 12k as the bbasis. Does this mean I put 12k into the 529 and it made 3k interest resulting in 15k? Do i have that correct?

If so am I correct in understanding  that if I took the 15K and bought a used car...I'd owe taxes on 3k of that distribution  to me.

Let's stop there  and see what you say then I can ask a more specific question to wrap this up.

[AmyC]

Almost. If you took the money to buy a car, you would have the $3,000 income plus a penalty. 

Pub 970 is for all things education, including the penalty on page 47.

We do nitpick trying to get every penny saved buy you are welcome to stop and add that tiny amount to your taxes! Enter the Q then enter the amount paid for tuition and the program can do the rest of the work for you.

[Hal_Al]

Q.   I don't understand why everyone keeps saying to enter room and board?

A. You seem to have a problem accepting that room and board, in this situation, are qualified expenses for reducing the amount of tax on the 529 distribution and/or  increasing the amount of LLC the student gets. The fact that "everyone" is telling you that means it is true. It may take a little effort to come up with an amount to use (check the school web site for Allowance for cost of attendance)

Q. Does this mean I put 12k into the 529 and it made 3k interest resulting in 15k? 

A. Yes, but not exactly. It means that 12K of you overall contributions and 3K of you overall earnings were allocated to this distribution.  

Q. If so am I correct in understanding  that if I took the 15K and bought a used car...I'd owe taxes on 3k of that distribution  to me?

A. Yes.  And you would also owe a 10% ($300) penalty on the unqualified distribution. There is a penalty exception (but not a tax exception) when a distribution is non qualified because the student (or parent) claimed a tuition credit or received a scholarship for the same amount of the distribution. 

[confusedrf]

Thanks for that answer there was a purpose to the question.  But first...

I am trying to understand what the qualifications for lifetime learning  are. I am guessing to get the maximum which I believe is $2000. ...You have to show $10000 in Qualified expenses that were not paid from ***earnings***on a 529 plan?  Is that true?

Plus, again , her tuition expenses were 15k paid from the 529 plan of which 12k I put in (cost basis) and it grew by 3K. So shouldn't she essentially have the 10k there anyway to qualify for the lifetime learning without room and board etc?  How is that different from her writing a check from her bank account for 10k or  using gift of 10K  to oay part of the 15k? At worst, maybe through some funky rule, She would have to pay tax on the three thousand dollars in 529 plan earnings, but still have the 10K there to get the 2K lifetime learning ...no? Perhaps that is exactly  what is going on...Am I starting to look at this correctly?

I really just want to understand all this.... it seems like everybody feels like SHE should be getting the life time learning.  I just want to be in a position to defend myself should the time come.

 I thank you all for your patience on this matter.

[Hal_Al]

Q.  I am guessing to get the maximum which I believe is $2000. ...You have to show $10000 in Qualified expenses that were not paid from ***earnings***on a 529 plan?  Is that true?

A. No. You just have to show $10,000 in Tuition. It doesn't matter how it was paid. 

Q. So shouldn't she essentially have the 10k there anyway to qualify for the lifetime learning without room and board etc? How is that different from her writing a check from her bank account for 10k or  using gift of 10K  to pay part of the 15k? 

A. Yes. All the discussion about room & board is about how you're going to account for the 529 distribution, with as little tax as possible, since you have allocated $10K to the LLC and away from the 1099-Q. 

Q. At worst, maybe through some funky rule, She would have to pay tax on the three thousand dollars in 529 plan earnings, but still have the 10K there to get the 2K lifetime learning ...no?

A. Yes. But, if we allocate some R&B to the 1099-Q that $3K can be reduced.  

Q. Perhaps that is exactly  what is going on...Am I starting to look at this correctly?

A. Yes