I have a few questions whether or not I have to include my 1099-Qs on my return:
1) I made a withdraw to pay the enrollment fee for my son's college in Fall '24. This was the first time I made a withdraw and I deposited it into my bank account and then paid the school from my account (the exact amount). Is this a taxable event since it was paid to me and do I need to report it?
2) I rolled three 529 accounts over from one state plan (VA) to another state plan (CA) and received three 1099Q forms. Do I need to report these? I obviously did not receive any funds as the rollovers went from beneficiary to beneficiary account.
Thank you
Q. I made a withdraw to pay the enrollment fee for my son's college in Fall '24. This was the first time I made a withdraw and I deposited it into my bank account and then paid the school from my account (the exact amount). Is this a taxable event since it was paid to me and do I need to report it?
A. No, because the student has sufficient educational expenses to offset the distribution.
Q. I rolled three 529 accounts over from one state plan (VA) to another state plan (CA) and received three 1099Q forms. Do I need to report these?
A. No. A rollover is also a qualified distribution.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
References:
Q. I made a withdraw to pay the enrollment fee for my son's college in Fall '24. This was the first time I made a withdraw and I deposited it into my bank account and then paid the school from my account (the exact amount). Is this a taxable event since it was paid to me and do I need to report it?
A. No, because the student has sufficient educational expenses to offset the distribution.
Q. I rolled three 529 accounts over from one state plan (VA) to another state plan (CA) and received three 1099Q forms. Do I need to report these?
A. No. A rollover is also a qualified distribution.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
References:
Qualified Tuition Plans (QTP 529 Plans) Distributions
General Discussion
It’s complicated.
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.
You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (on the recipient’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
There is $1120 of taxable income (on the recipient’s return)
**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.
Thank you, this was my understanding as well before I made the transactions but I wanted confirmation as information online is not very clear. I appreciate the help!
hello this was helpful, but I still have a question. When I added the 1099-q information (related to the 529 distribution) to my son's return, he went from getting a minor refund based on his odd jobs to owing a lot of money. This article states that the1099-q info should be added to the student's return and the 1098-T info should be added to the parent's return; however, my son doesn't have any qualified educational expenses included in his return because I didn't include the 1098-T information. How should I handle this? The 529 distribution went directly to the school and was well under the total cost of tuition and R&B. Thanks.
"This article states that the1099-q info should be added to the student's return and the 1098-T info should be added to the parent's return>"
That's an over simplification. The 1098-T can be entered on both returns when needed, with necessary adjustments.
But, you say: "The 529 distribution went directly to the school and was well under the total cost of tuition and R&B."
In that case, just don't enter the 1099-Q, per the explanation, above.