529 Plan Changing A Refund

[nambuman]

I am helping my dependent college-age daughter with her federal tax return.  She is the recipient of a College Illinois 529 plan.  As the parent, I inputted her 1098-T into my tax return.  She earned about $4,500 last year.  Up until I got to the 529 section, TurboTax showed a refund of $187.  Once I entered her 1099-Q form, which shows box 1 at $8,433, box 2 at $2,403, and box 3 at $6,030, TurboTax then showed that she now owes $254.  I thought that the College Illinois 529 plan was tax-free.  Did I input something wrong?  Am I required to input her 1099-Q form?  Thanks.

[AmyC]

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.

Only input the 1099-Q if there was income left after all qualified expenses are subtracted. Either way, make a note of your calculations and tuck it in the tax folder in case the IRS asks.

If she lived in a dorm, those expenses may have been more than the 1099-Q.

[nambuman]

Thank you AmyC.  I am still uncertain what to do.  The 529 plan was used to pay her tuition.  Any remaining went to be paid, automatically, to her housing and food plan.  Do I not input the information from the 1099-Q at all into TurboTax and let the refund take place?  If yes, why isn't TurboTax smart enough to tell me to do that?

[MarilynG1]

Yes, if the 1099-Q was used for Qualified Education Expenses (including Room & Board), it does not need to be entered in any tax return.

If your student inputs the 1099-Q in her return, she does not have the corresponding Education Expenses to report (since you reported the 1098-T in your return), which is why her refund/tax due changes.

Here's more info on Form 1099-Q.

@nambuman