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529 and shcolarship daughter a dependent.--how do i do this?

Enough to make me insane!

My daughter (dependent) got 1098 t  32 k in scholarship   17 k used for tuition etc.

She had a 529 plan -1098Q with 30K gross distribution 16k of that earnings (last year we wanted to use it up)

She has Room and board expenses of 18K  (which I can not figure how to enter against the 529 amount--it should allow it (unpenalized) as she had offset scholarship) 

How do I enter things in the right order---my tax return, her tax return.

I don't think I qualify for any credits so....and yes there is some tax.

Thank you all who help!

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6 Replies
JillS56
Expert Alumni

529 and shcolarship daughter a dependent.--how do i do this?

Yes, this does get complicated when you have both the 529 Plan 1099-Q and a 1098-T.   If you are claiming your daughter as a dependent, then it is reported on your return.   

 

What should I do with Form 1099-Q? If you used all the money you withdrew from your QTP or Coverdell ESA to pay for qualified education expenses, and meet other IRS requirements, the distributions aren't taxable and you don't need to report them as income. Just file your 1099-Q with your tax records.

 

You are not required to report a 1098-T and most people not eligible for the credit do not report the 1098-T. 

 

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! 

 

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." 

 

General Discussion of 1099-Q/1098-T

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.  However, in your daughter's case her scholarship amount in Box 5 exceeds the tuition amount in Box 1 so there will not be a  education credit, but the excess will be reported as other income on your return.

 

Normally, you can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses she 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 her 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 "her" money that paid the tuition.

In addition, there is another rule that says the 10% penalty is waived if she was unable to cover the 529 plan withdrawal with educational expenses either because she got scholarships or the expenses were used (by her or the parents) to claim the credits. She'll have to pay tax on the earnings, at her 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 (usually on the student’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

You have $1120 of taxable income  

 

**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. 

 

In your case, there is going to be income to report.   One thought what is your income level, are you above the phase out for income, if so, then you would not be able eligible for the education credit and would not have to report the 1098-T.   

 

 

 

 

529 and shcolarship daughter a dependent.--how do i do this?

Thank you for answering---followup

So the excess 15k scholarship money on the 1098T (not used for tuition or books) is taxable  I think is taxable to my daughter---so put on her tax return?

And the 529 money 30K which I could write off 17K in room and Board expenses should go on Parents tax return?

If this is how it works--it makes a little more sense.....

Thanks for your time and knowledge!

Hal_Al
Level 15

529 and shcolarship daughter a dependent.--how do i do this?

More info needed.  Who was the "recipient" of the 1099-Q (that's whose return the 1099-Q goes on)?

 

Does the student have any other income? How much? And from what source (wages or investments)?

 

What's gonna happen is that some of the scholarship and some of the $16K 529 plan earnings are going to be taxable. 

 

Why do you think you don't qualify for a tuition credit? Income too high or there's not enough expenses?  Have you claimed the American Opportunity Credit (AOTC) in the past? How many times?  If you qualify, it may behoove you to claim it (and student pay more tax). 

529 and shcolarship daughter a dependent.--how do i do this?

*More info needed.  Who was the "recipient" of the 1099-Q (that's whose return the 1099-Q goes on)?

Daughter--Whenn I put it on her return---I tried to find where to put the room and board expenses but TT will not let me do it---I figure it is something I answered or because she is a dependent?

(so end point it taxes the full 16K earning and gives a penalty)--

 

*Does the student have any other income? How much? And from what source (wages or investments)?

The only income is from the Scholarship 32 K (tuition and fees only 17K) the remaining 15 K is taxed as income.

 

*Why do you think you don't qualify for a tuition credit? Income too high or there's not enough expenses?  Have you claimed the American Opportunity Credit (AOTC) in the past? How many times?  If you qualify, it may behoove you to claim it (and student pay more tax). 

The scholarship covered almost all expenses--tuition and room and board-but only  "tuition expenses"can be claimed---under the scholarship Remainder is taxable.

The 529 we just took out as it was not needed and we don't have any other kids(previously we were able to use room and board expenses against that-so only a portion would be taxable (and no penalty because of the scholarship)-but can not find how to do it on TT)

Thanks again for time and effort!

Hal_Al
Level 15

529 and shcolarship daughter a dependent.--how do i do this?

The interview is complicated and it's easy to make mistakes.  It's best if you enter the 1099-Q before entering the 1098-T.  This is particularly important to get the Room & board screen.  

 

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

The student information worksheet and the 1099-Q worksheet will show how TT allocated these expenses. 

 

It's helpful if you know where you need to get to. And that's the hard part. You want to allocate $4000 of expenses to claim the American Opportunity Credit (AOC), on your return. You want $12,200* of her scholarship to be taxable and the rest of the expenses to be allocated to the 1099-Q to reduce the taxable portion.  So, you want to allocate $19,800 of expenses to scholarship (32, 000 - 12200 = 19,800). 

You have 17,000 (tuition) + 18,000 (room and board) = $35K expenses (add any book and computer expenses to increase that total). 35,000 - 4000 - 19,800 = $11,200 of expenses allocated to the 1099-Q.  11200 / 30000 = 37.33% of the earning are tax free (62.67% are taxable).  0.6267 x 16,000 = $10,027 taxable income. Most of that will be taxed at the parent's marginal tax rate ("kiddie tax").

 

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. That gets you the AOC. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. What you enter is not sent to the IRS

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses and room and board separately.  Answer yes to book expenses to get to the R&B screen .   When asked how much of the scholarship was used for room and board, enter $12,200. That makes it taxable. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. 

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s  return. The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T

 

 

*Taxable scholarship is treated as earned income for purposes of calculating a dependent's standard deduction.  A dependent's standard deduction is he earned income + $350, but not more than $12,550.

JillS56
Expert Alumni

529 and shcolarship daughter a dependent.--how do i do this?

Yes, if you are not claiming your daughter she can report the Form 1098-T on her return and will pay tax on the excess of $15,000 as other income.   Keep in mind that she will receive a standard deduction which will reduce the amount that is actually taxable.  The standard deduction for a filing status of single is $12,550 for 2021.   

 

You will have to report the excess of $17,000 on your return (if the social security number on the 1099-Q is your or your husband's social security number).  If it is your daughter's social security number, then the 1099-Q would be reported on her return and she would be reporting other income of $32,000 less the standard deduction of $12,550.

 

I hope this clears everything up for you.   Just remember the key to this is that you do not claim your daughter and whoever's social security number is on the 1099-Q is whose return the 1099-Q must be reported on.

 

 

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