College Daughter Received 529 Distribution from 529 Plan owned by her Uncle

[mtnbryce]

My brother has a 529 Plan for my dependent daughter (his niece) who is currently in college.  In 2021 he distributed funds from the plan to her to pay for qualified expenses (tuition).  He received a 1099Q related to the distribution.  She received a 1098T for all education expenses (we used a separate parent owned 529 plan to pay the remainder of the qualified expenses).  My daughter needs to file her own tax return.  How does she account for the 529 distribution from her Uncle on her tax return?

[KrisD15 · Accepted solution]

To avoid confusion, funds from a 529 plan to pay education expenses should be transferred to the school directly (resulting in the 1099-Q being issued to the student) or made by the student (beneficiary). 

Normally the parent claiming the student enters the 1099-Q and 1098-T into their TurboTax program so that the program can do the math.

The parent's TurboTax program then tells the parents if the student needs to claim income and/or if the parents are eligible for an education credit. 

The short answer is that in your situation, you will need to work this out on your own. 

You can subtract your distribution as well as your bother's from expenses. 

If the distributions were used and covered tuition expenses, and expenses are at least as much as the distributions, no one would need to report the 1099-Q.

I would ask if there are also any expenses paid such as for room and board, books and/or supplies. Distribution can be used to pay for room and board as well as tuition, fees, book and supplies.

And what about Education Credits? The IRS encourages Taxpayers to allocate distributions, scholarships, and expenses in a way that allows for an education credit if possible. 

And what about scholarship income? If scholarships are not used for tuition, fees, books or supplies, it would become taxably income which the dependent student would need to claim. 

Distributions used for room and board is tax-free. Scholarships used for room and board is taxable.

I assume the 1099-Q was issued to your brother. If not, and it was issued to the student, and the student is your dependent, enter that 1099-Q, your 1099-Q and the 1098-T into your program so TurboTax can make the calculation. 

Select "Maximize my Tax Break". Your program will say if the student needs to claim any income and if so, how much. If the student needs to claim income, only the amount is entered into the student's program, not the 1098-T.

If the 1099-Q was issued to your brother, and he does not want to claim any income from it, you would need to subtract that amount from Box 1 on the 1098-T and enter that "adjusted" 1098-T into your program. 

To make things even more complicated, the program may suggest scholarship or distribution income is delegated to the student if this results in an Education Credit for you since a credit is usually worth more than the tax. 

IRS Pub 970 has great information and examples. 

[mtnbryce]

Thank you for the information. To date I have entered the 1098T and 1099Q (issued to me) into my return.  The tuition and room/board expenses exceed the sum of the distributions from my 529 plan plus my brother's 529 plan. The response below states, "If the distributions were used and covered tuition expenses, and expenses are at least as much as the distributions, no one would need to report the 1099-Q." Since the 1099Q from my brother's plan was issued to my brother, and our total distributions are less than the total expenses, does that mean I do not need to include his 1099Q in either my return or my daughter's return?

[JillS56]

Correct.  If the amount of the 529 distribution was used for qualified educational expenses, you do not have to report on your return.   I would suggest that you keep the 1099-Q, 1098-T and any backup information for the expenses with your tax papers.

[mtnbryce]

Thank you so much for the additional information!  Greatly appreciated!