1099-Q is taxable

[phennes]

Hi,

In 2022, an overpayment of my sons tuition was made from a 529 plan.  I was refunded the difference from the school and it was not returned to the 529 within 60 days.  What do I need to do now to report is as income or is that necessary?

Turbo tax states "Looks like your 1099-Q is taxable".  Will that program auto adjust income for me and complete the proper form or do I need to do that manually?  The 1098-t only reported tuition paid and a credit for scholarships and not room and board that was also paid from the 529.

[AmyC]

I am reading this a couple different ways with options on how to handle. You stated 529, scholarship, room and board, and tuition. The program will handle making the 1099-Q taxable - which is why you need to step in. At the minimum enter room and board with the Q. I would go a different route.

How things are assigned makes all the difference. 

Example: 

box 1 tuition is $20,000 

box 5 scholarship is $15,000

529 is $20,000

Room and board $10,000

First, determine if you qualify for the AOTC.  The phaseout for  AOTC is a modified AGI of:

• $80,000-$90,000 or
• $160,000- $180,000 MFJ

If you qualify to claim education credit, your goal is $4,000 spent on tuition for maximum credit. The IRS allows juggling numbers - prefer to do that after eliminating the Q when possible.

Second, try to eliminate the 1099-Q.

In the example above, the Q covers room and board plus $10,000 of tuition. It doesn't need to be filed. Tuck it in tax folder. IRS Pub 970 states: Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.

Third, juggle numbers as needed. The IRS encourages this in Pub 970.

The Q is gone along with $10,000 of tuition which leaves $10,000 plus books, etc to be covered by scholarship money. 

Options are:

• Scholarship $15,000 - $10,000 tuition - books, etc = taxable income to student.
• Scholarship $15,000 - $6,000 tuition - books, etc = taxable income to student with a bonus of full AOTC credit for parent claiming the student.
• Any amount between $6,000 and $10,000 for tuition and varied AOTC credit and scholarship income.

Things to remember are:

• Most people are always trying to reduce their income so they subtract box 1 from box 5 and enter the difference. People get a certain mindset, reduce income so making the jump to increase credits is hard for them.
• See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.
• Please see my 529 example with IRS information here.
• Tax Benefits for Education: Information Center| IRS

[phennes]

Hi thanks for the reply,  I do qualify for the AOTC and Turbotax applied the credit

The 1099-Q I received had the following values

box 1 15431.46

box 2 3969.49

box 3 11461.97

box 5 Qualified tuition... state checked

1098-t from school

box 1 5990.46

box 5 1167

7 and 8 checked

My dilemma is that the 529 distribution is the same amount as tuition, room and board combined.  The scholarship amount is the excess amount and that was refunded to me.  I took a distribution and had the check sent to the school to pay for the entire invoice I owed the school for that quarter before the scholarship credit was added later..

[AmyC]

Scholarships must be claimed the year received. 

Tuition can be the current year plus the first 3 months of the next year based on many schools billing near the end of the year for the next semester. Tuition is claimed when paid rather than when billed.

The AOTC is good 4 times while a student is in school during 5 tax years due to starting in the fall.

Also, you did not mention required school supplies, books, etc. Those can add up. Some schools even require a computer.

You can say the 1099-Q covered everything, no AOTC, the scholarship refund is taxable to the student. However, it sounds like you have additional tuition that should be included in box 1.

Because the 1098-T is informational, you should change the tuition amount to the actual amount paid. You have the paperwork to back you up.

With the extra tuition and expenses, you may be able to get some AOTC with the scholarship taxable to the student. 

The IRS recommends you juggle numbers. It may be a game of playing on your return and your student's for the best solution.

See Pub 970 for rules.

[phennes]

Thanks for all your advice.  One last questions.  Turbo tax suggest that the 1099-q income is taxable to the student and I take it that he would need to file a return to report that.  Is that something I can report on my return instead?  Schedule 1 on line 8? After I added the room and board, I noticed the amount taxable decreased quite a bit which is good.

[SharonD007 · Accepted solution]

It depends. The 1099-Q should be reported on the tax return of the person whose SSN is on the form 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. If that’s the case, the earnings on the excess distribution would be taxable income (which sounds like your case). 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.

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 any scholarships. If the total educational expenses are more than the amount in box 1 of the 1099-Q, you do not need to report the 1099-Q.  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 the tax return that the 1099-Q is reported on 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 the student 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 the student files a tax return and is your dependent, make sure they check the box indicating that someone else will claim her as a dependent.