529 Withdrawals

[rod_davis99]

Please advise what expenses from 529 account are considered "Qualified Higher Education Expenses". The IRS publications are not very clear. It's important know to determine if any of the withdrawals could be considered taxable.

Note:  I was told by someone at TurboTax that "Qualified Higher Education Expenses" would include such items as:  1) Tuition and mandatory feeds;  2) Books that must be purchased for classes; 3) Room and Board so that the amount is not greater than the amount shown on the college website; 4) laptop + software needed for school

HOWEVER, the TurboTax software appears to be broken as only expense #3, Room and Board, is carried through to cell 2C [Adjusted Qualified Higher Education Expenses]  of the 1099-Q form [QTP Computation of the Taxable Distribution] .  As a result, the TurboTax software shows that I owe taxes on a sizable portion of the 529 withdrawals - which I know is not correct.

Please advise what is correct.

[DawnC]

All of the items you listed are considered qualifying expenses for 529 funds.   The only difference is that for the purposes of claiming the education credits, room and board doesn't count.   But since you are reporting a 1099-Q, the room and board (and the other expenses) count as qualified education expenses (QEE).  

If you used all of the 529 funds on QEE, you do not have to enter the 1099-Q at all.   Have you entered the 1098-T yet?   After you enter the 1098-T along with any scholarship income, TurboTax should apply the excess to those other expenses.  

For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return.   However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.   Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. 

For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.

Guide to IRS Form 1099-Q: Payments from Qualified Education Programs

[rod_davis99]

Thank you, Dawn, for the information you provided. Very helpful.

Yes, I did complete 1098-T and there are no questions or issues with this.

Again, the confusion I had is that the TurboTax software is not correctly pulling all the appropriate categories of expenses to show them as as "Qualified Higher Education Expenses" in cell 2c of the 1099-Q worksheet.  As a result, the software was showing that some of the 529 withdrawals were taxable and therefore the amount of tax I owed was much higher than was expected. As a result, I have now had to artificially increase the Room & Board expenses shown in the software to account for the fact that the other allowable categories such as Tuition are not being included in cell 2c (i.e. to make the total amount of Qualified Higher Education Expenses to be correct in cell 2c, I have had to enter in the software all the expenses under Room & Board).