1098T and 1099Q

[72JLtax]

I entered the 1098T for my freshman dependent on my return.  The 1098T and the 1098Q are both in my dependent's SSN.  The amount in Box 1 of the 1098T matches Box 1 of the 1098Q. Every other box is empty on the 1099Q except gain (>$4K) and basis. The school's detailed charges page lists the dorm fee, meal plan, campus dining fee, lab fees, tuition and lists negligible amounts for a book, student athletic fee (student is not an athlete) and housing ($10?). In total these charges exceed the amount listed on 1098T and 1099Q by a few hundred.  Does that mean that I don't need to do a return for my student who had no income in 2022 to report the 1099Q gain?  Should I do one anyway just to confirm for IRS? The student also received a Federal student loan from filing the FAFSA. Does that go anywhere in Turbo Tax? Does that loan count against the gain? Thanks

[Hal_Al]

Q. Does that mean that I don't need to do a return for my student who had no income in 2022 to report the 1099Q gain?

A. Yes.

Q.   Should I do one anyway just to confirm for IRS?

A. No.  You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board  to cover the distribution. 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!  

Q.  Does that go anywhere in Turbo Tax?

A. No.  Loans are not income.  It's borrowed money that has to be paid back.

Q. Does that loan count against the gain? 

A. No.  The loan is irrelevant.  There is  no taxable "gain" from the 1099-Q, because all the 529 money (basis and gain) were used for qualified expenses.

You should claim the tuition credit, on your tax return.  There are plenty of expenses for you to do that and still keep the 1099-Q tax free.  Dorm fee, meal plan, campus dining fee, lab fees, tuition, books, student athletic fee and even a computer are all qualified expenses for a 529 distribution.  You only need to use $4000 of tuition for the American Opportunity Credit. 

________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

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 (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**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.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

[Carl]

See if this helps for future tax years. Read through the below three times.

The first time, read it all.

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

The third time, only read that which applies to your situation.

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.

[72JLtax]

So, just to make sure I understand.  The 1098T *AND* 1099Q lists about $11K total and includes the expenses I listed above like dorm, meal plan, labs, tuition, etc.  I put the entire 11K from the 1098T on parent's return.  That only leaves a few hundred other expenses that the school didn't use from the 529.  The 1099Q gain is >$4K.  So do I have only the few extra hundred dollars in excess of the 1098T and 1099Q to use against the 1099Q gain, or am I supposed to CHANGE the amount listed on the 1098T to just $4K for the AOC and then ignore the 1099Q so far as reporting goes since the extra $7K I didn't claim will cover the 1099Q gain?  Is changing the amounts on these government forms going to cause an issue? Should I also include the dependent's 1099Q on parent return for clarity? Someone in this topic said put in the dependent's 1099Q first (has their SSN).  Someone else said since it has dependent's SSN and gain is covered, I can ignore it on parent's return, and the non-working dependent doesn't need to file it either. Someone else said absolutely put the 1098T on parent return.  I don't see a place to put in tuition other than when Turbo Tax asks for Box 1 of 1098T.  Is that where I change amount reported by school and put the $4K? Thanks

[Carl]

The 1098-T box 1 only reports "qualified" education expenses of tuition, books, and lab fees. Nothing else. It typically does not include the meal plan or room and board, because those are not qualified education expenses.

Box 5 is all scholarships, grants and any other amounts paid to the school by all entities. So if box 5 is greater than box 1, the difference "could" be taxable income to the student. But if that difference can be attributed to 529 distributions, then it can be used for the "allowed" expenses of room and board. The room and board claim against 529 distributions is allowed, provided that room and board was "in direct support" of the education.

If you'll just work through the education section the way it's designed, once you enter the 1099-Q, a later screen will ask you about room and board expenses.

[Hal_Al]

We're not communicating, talking in generalities. Provide specific information  for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?

[72JLtax]

I went back and added the 1099Q to parent's return.  Turbo Tax asked who the student and I was able to select the dependent. Then a page came up that allowed me to put in expenses. The 1098T was also added with Box 1 amount as shown on the form (11K).  Box 5 and the rest of 1098T except Box 1 is empty.  When all of the expenses were totaled, including R&B, they exceeded the 1098T Box 1 and 1099Q Box 1 amounts (which are the same), and the 1099Q gain was deemed taxable. I was under the impression that 1099Q gain wasn't taxable if qualified expenses exceeded the distribution. I need assistance specific to this case please. 

[72JLtax]

Parent

Student is parent's dependent

Box 1 1098T:  $11K

Box 5 1098T: $0

No other scholarships

Box 5 1098T does not include any 529 payments (is $0)

No scholarship

Box 1 of 1099Q: $11K

Box 2 of 1099Q: $4100

Student's name and SSN are on 1099Q

R&B is $3670

Other qualified expenses: Books $382, Labs $375, Meal Plan $2200, Tuition $5500, computer $900, campus dining $225, required enrollment fees $465

Student doesn't have any taxable income

Trying to claim AOC on dependent; eligible

Student is undergrad freshman

Thanks

[Hal_Al]

Delete the 1099-Q.  It does not get entered on either the parent or the student's tax return*. The student does not need to prepare or file a tax return.  The student is not eligible to claim the AOC on his return.

You have more than enough expenses to fully cover the 1099-Q (529 plan distribution) and have enough tuition left over to claim the American Opportunity Credit (AOC). 

Enter the 1098-T on your return, to claim the AOC.  

*The 1099-Q does not go on your return because you were not the "recipient" of the funds or the 1099-Q.  The 1099-Q does not go on the student's return because we know none of it is taxable. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

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.