529 Plan Withdrawal

[dafulcrum]

I neglected to withdraw funds from my sons 529 plan for 2020 but did it in 2021 to catch up with expenses. Am seeing there is no way to fix this in TurboTax. Any suggestions on how to remediate? Thx.

[RobertB4444]

You don't need to enter the 1099-Q into TurboTax unless the withdrawals exceed qualified education expenses.  When calculating whether you need to enter it this year include the expenses from 2020.  They were qualified and you paid them with the withdrawal.  If the total expenses for the two years exceed or equal the amount on your 1099-Q don't enter it in the return.

[dafulcrum]

I like the idea of not entering the 1099-Q but doesn't the university send the 1099-Q to the IRS and wont they see I did not include it?  Thx.  

[RobertB4444]

The financial institution that issued you the 1099-Q sent it to the IRS.  The IRS knows that you took the money.  You are entering the education expenses - or your child is - in order to qualify for the education credits.  So the IRS knows about the education expenses too.  As long as the amount that you pulled out of the 529 is less than the education expenses then you're all set.

[dafulcrum]

Yeah, that is the problem.  If I add up both year's expenses, they total ~$50K which is the amount I pulled as a lump sum from the 529.  Is 1099-Q is only for the 1 year and says he had tuition of ~$10K.  With room and board, the $50K is correct to cover both years but the IRS will only see the ~$10K.  I'd think that would be a big enough disconnect for them to investigate.  If you are saying that I can just report the $50K and not include the 1099-Q, then that would be good.  Thx.

[DawnC]

You only have to report the 1099-Q if you took more than your qualified expenses.    As long as you did not take an education credit in 2020 for the excess expenses you would have had, your payment records for tuition and room & board for the 2 years would suffice.   Just keep detailed records in the case of an inquiry.     Room & Board does not count toward the education credits, so it is unlikely that you have received any tax benefit for those expenses - which 529 money does cover.

Guide to 1099-Q.    See the highlighted part in this article.   

[dafulcrum]

Thanks.  I went back and looked and  see that we received a 1098-T in 2020 for the balance of the costs I was looking to deduct and was not included in last year's tax return.  Can I just add this to my 2021 return and keep for my records in case the IRS comes to ask?  Thx.  

[KrisD15 · Accepted solution]

If the distribution for the expenses were made in a timely fashion, but crossed the tax year, and you did not apply the expenses to a credit, you should be able to ignore reporting the 1099-Q. Be sure to have records supporting that decision.

It is a grey area, but I would compare the distribution as a refund of expenses paid. 

That could require "Credit Recapture" however, since you didn't apply for an education credit on your 2020 return, there would be no need to recapture anything.  

According to the IRS:

"Refunds received after 2021 but before your income tax return is filed. If anyone receives a refund after 2021 of qualified education expenses paid on behalf of a student in 2021 and the refund is paid before you file an income tax return for 2021, the amount of qualified education expenses for 2021 is reduced by the amount of the refund."

Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2021, or any refund of your qualified education expenses paid in 2021, is received after you file your 2021 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2021 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2021 and figure the amount by which your 2021 tax liability would have increased if you claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received."

IRS Pub 970

[dafulcrum]

In addition to the 1099-Q, I received a 1098-T for 2021.  Also, I received a 1098-T in 2020 that was not included in my 2020 return.  To cover the full amount of the 1099-Q, is it ok in include both 1098-T's in my 2021 return?  

[RobertB4444]

No.  The 1098-T for 2020 should have been included in the 2020 return.  But since the 1099-Qs for this year equal the 1098-Ts for this year and the previous year you have no issues and no taxable reporting event.

[dafulcrum]

The 1098-T for 2021 is only ~$10K and the 1099-Q is for $67K.  If I include the 1098-T from 2020, then would be very close to the $67K and it was not included in my 2020 return.  Ok to not include any of these or best to include all of them?  Thx.  

[JillS56 · Accepted solution]

It is best to not include any of them.   Just keep the 1099-Qs with your tax records and the backup of what you paid for qualified education expenses.   Including will create a taxable situation on about $57k of income.   You know that you use the funds to cover education expenses.  Thus, do not report.   

The 1099-Q and the 1098-T are tax forms that do not have to be reported.