1099-Q

[Marsha11952]

I am unsure if I have to enter my grandson's form on his taxes. He is a full time student at a university being claimed by his parents. His parents will claim his 1098-T. My grandson has 2 W-2's from his summer jobs one for $3563 and one for $1095. His 1099-Q has a gross distribution of $4577 with earnings of $418 and a basis of $4160

[MaryK4]

You will want to provide the 1099-Q information to his parents since they are claiming him as a dependent if they claim the education credits- there is a possibility they could inadvertently "double dip" if the 529 funds were used to pay some expenses and they claim credits on the same amount.  

From Reporting 529 Plan Withdrawals on Your Federal Tax Return: 

529 plan distributions used to pay for non-qualified expenses are subject to income tax and a 10% penalty on the earnings portion of the withdrawal. This includes 529 distributions used to pay for airfare and other travel costs, college application or testing fees, health insurance or room and board costs beyond the college’s cost of attendance (COA) allowance.

If the student’s parent qualifies for the AOTC or LLTC, they must adjust their total qualified higher education expenses to avoid double-dipping. To determine the amount of a qualified 529 plan distribution, any amount used to generate the federal education tax credit must be subtracted from the total qualified expenses.

If the beneficiary receives a tax-free scholarship, fellowship grant, Veteran’s educational assistance, employer-provided assistance or other tax-free educational assistance, the amount of the payment must also be subtracted from the total qualified expenses. 

[Marsha11952]

I still find it too confusing. I used the 1098-T on the student's parent's tax return but on the advise of a CPA did not include the 1099-Q anywhere as he said it was double dipping and was part of the other expenses paid for with the 1098-T.

[RalphH1]

{Edited 4/19/23 | 10:50 am PST]

The 1099-Q income would go on the return of the person whose social security number is on the form (see this other Community discussion), if they’re required to file. And since the parents are claiming your grandson as a dependent, they would be the ones who get an education credit (on their return), if there is going to be one.

So if the 1099 belongs to someone else besides the parents, things are complicated by the allocation that must take place across the two tax returns (and as MaryK4 said, the parents need to know about the distribution). The “double dipping” you were talking about is the concern, and the concept is that any dollar of “qualifying expenses” (i.e. tuition and fees) can be used for only one tax benefit: to exclude a dollar of the 529 distribution from taxation or to get a credit, but never both.

The simple way to to do it is to apply the tuition to the 529 plan distribution (making it non-taxable), then use the remaining tuition to claim an education credit. And the IRS is fine with this (since there’s no double-dipping), but it may not give you the best possible overall tax result.

Fortunately, you’re allowed to first reduce the 529 distribution by “room & board” (since it’s a “qualifying expense” in this case), and then to allocate as much as you want of the remaining 529 amount to something other than tuition, increasing the tax on the return where it’s being reported. Doing this then gives the parents more tuition to use for the education credit which is actually larger than that additional tax (sometimes much larger, especially when the 529 tax is on the kid’s return, in a low bracket).

Here is the IRS telling us about this treatment. Note that this is more applicable to undergraduates (as the American Opportunity Credit is the best one, and only available to them). And it takes a little more time (and patience!) for the preparation...

@Marsha11952, I also find this way too confusing! I hope this was helpful, but be sure to repost with any additional questions. Also, if you give a little more info (like whose 1099 it is, how much tuition shows on the 1098, the amount of any financial aid which is also involved, and whether you already filed...), we can provide some more specific advice.

[xmasbaby0]

And....your grandson's W-2's do not go on your return or his parents' return.  He can file his own return in order to seek a refund of federal or state tax withheld as shown on boxes 2 or 17 of his W-2's.  He must say on his own return that he can be claimed as someone else's dependent.