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1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

I have received 1099 Q which shows me as Receipient , All money taken from 529 plan was for kids  education. If I enter 1099 Q in TurboTax, it increases my tax ( it is getting counting as Income while this is not income since this is for qualified expenses)

I have read in TurboTax forum that this need not to be reported but again want to confirm.

Please let me know.

 

Thanks

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Hal_Al
Level 15
Intuit Approved! This answer has been verified for accuracy by an Intuit expert employee

1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

Q. I have read in TurboTax forum that this need not to be reported but again want to confirm.

A. That is correct. 

 

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. 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! 

References:

  1. 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." 
  2. 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”.

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4 Replies
Hal_Al
Level 15
Intuit Approved! This answer has been verified for accuracy by an Intuit expert employee

1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

Q. I have read in TurboTax forum that this need not to be reported but again want to confirm.

A. That is correct. 

 

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. 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! 

References:

  1. 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." 
  2. 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”.
Hal_Al
Level 15

1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

You may want to consider paying a little tax on the distribution, if that allows you to claim a tuition credit. By using $4000 of tuition for  claim the American Opportunity Credit, you may be able to claim a credit of $2500 (max).  In the example below, the taxpayer would only pay  $150-$250 more in tax to get that 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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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. 

1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

>>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.

 

 when I enter 1099 Q in TurboTax as entries in 1099 Q form, I see that it is changing my Tax Amount in TurboTax ( Top where you see whether you are getting refund or paying tax to IRS) so my Tax Amount increases so TurboTax is adding as Income so this is confusing.  So Why TurboTax is adding 1099 Q as income. I am using TurboTax Premier desktop version.

Hal_Al
Level 15

1099 Q received, do I need to enter it in TurboTax. It was used for qualified education expenses

Q. So Why TurboTax is adding 1099 Q as income?

 

There are three things you can do with your Qualified educational expenses (QEE):

  1. Allocate then to scholarships (so that the scholarship remains tax free)
  2. Use them to claim an education credit
  3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise. TurboTax allocates QEE, in that order, but it doesn't do a very good job.  It's best if you have some idea of the outcome expected, when you make your entries. 

One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the  529 earnings, shown on the 1099-Q, as being totally tax free.

 

If you know none of it is taxable, it's best to just not enter the 1099-Q or educational expenses.  

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

 

 

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