529 withdrawal

[dried]

I received a 1099Q for a $14K withdrawal on 12-22-22. I used this to pay tuition with the majority of that money on approximately 1-7-22. The rest will be used later in the year for the fall semester. I'm being told I have to pay tax and a penalty on the withdrawal since I don't have a 1098T to offset it for 2022. I will receive the 1098T in 2023. It's going to cost me around $4k in additional taxes if I can't find a way to fix it. Any advice? Thanks

[SharonD007]

One of the rules for 529 savings plans, which are generally  set up to fund a child's college education, is that the money must go toward covering qualified education expenses. Otherwise, the earnings portion of any withdrawals will be subject to taxes and a 10% penalty.

For you to avoid the taxes and penalty, first, you will need to rollover the $14,000 distribution to a Qualified Tuition Program (QTP) 529 Plan within 60 days of 12/22/22. It can be rolled over to another QTP for the same beneficiary or a member of the family or to an ABLE account for the same beneficiary or a member of the family. If you are considering rolling the funds to an ABLE account, there are annual contribution limits.

Secondly, you will have to request a withdrawal in 2023 to cover the educational expenses that you will pay for in 2023. You are correct that you will receive a 1098T with the educational cost for 2023. 

You will receive forms 1099-Q and 1098-T in 2024 with the amounts of your 529 plan distributions and how much the tuition was. You will have to reconcile and calculate if there is a taxable portion. Please note, the 1099-Q should be reported on the tax return of the person whose SSN is on the form.

For additional information, please take a look at the TurboTax article What is IRS Form 1099-Q?

For additional details, please review the IRS Pub 970 - Tax Benefits for Education.