Must I claim my child as a dependent?

[Opus 17]

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@bill_321 wrote:

Yes, I agree.  It's just that the 1099-Q doesn't break it down to that detail (only shows 25k withdrawal, 10k earnings, and 15k contributions).  TT asks for numbers in those boxes.  There was no place (at least when I did my "test run" last March) to specify if some component wasn't subject to penalty.

So, the tuition part is "excess", but not subject to penalty (b/c of the grant/scholarship exemption).

Thanks for your help.  Will revisit in the spring.

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Publication 970 says "This exception only applies to the extent the distribution isn't more than the scholarship..."  If you withdrew $10,000 against $zero of allowable expenses, because there was a $10,000 scholarship, the $10,000 would not be subject to the penalty.  But you are discussing withdrawing $25,000 against $15,000 of expenses.  The whole distribution is more than the amount of the scholarship.  There is nothing in the publication that suggests you can treat the withdrawal as two separate withdrawals of $10,000 (taxable but exempt from the 10% penalty) and $15,000 (allowable).   

Pending correction by an expert, I think the excess withdrawal is still subject to the penalty. 

[bill_321]

$10k for tuition withdrawn.  Tuition grant was $10k.  This is exempt from penalty, but not tax.  Doesn't exceed grant.

$15k for R&B withdrawn.  This is exempt from tax and penalty as an allowed expense.

Total expenses $25k.  Total withdrawn $25k.  

But, that's why I think the 1099-Q should provide more detail.  Upon withdrawal at 529 site, there is no way to specify that the withdrawal is "penalty exempted".   Just allowable or non-allowable.  The detail on the 1099-Q doesn't match the detail needed to file if one has more than one category of a) allowed ... in which case you don't need to use the 1099-Q at all....b) non-allowed, subject to tax and penalty and c) non-allowed, but exempted from penalty.  And, one can definitely have withdrawals from more than one of those categories.

[Opus 17]

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@bill_321 wrote:

$10k for tuition withdrawn.  Tuition grant was $10k.  This is exempt from penalty, but not tax.  Doesn't exceed grant.

$15k for R&B withdrawn.  This is exempt from tax and penalty as an allowed expense.

Total expenses $25k.  Total withdrawn $25k.  

But, that's why I think the 1099-Q should provide more detail.  Upon withdrawal at 529 site, there is no way to specify that the withdrawal is "penalty exempted".   Just allowable or non-allowable.  The detail on the 1099-Q doesn't match the detail needed to file if one has more than one category of a) allowed ... in which case you don't need to use the 1099-Q at all....b) non-allowed, subject to tax and penalty and c) non-allowed, but exempted from penalty.  And, one can definitely have withdrawals from more than one of those categories.

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But it's all treated as one withdrawal, you get 1 1099-Q listing everything.

Or from a more deterministic point of view, once you got the $10,000 tuition refund, you should have only withdrawn an additional $5000 for room and board.

I don't see any support for the idea that you can calculate the penalty or exemption in the way you want to.  But again, I am willing to be corrected by a smarter expert.

[Hal_Al]

@bill_321  said "that's why I think the 1099-Q should provide more detail."

That's not reasonable. The 529 Plan administrator has no way of knowing what you or your student did with the money or whether or not the student had a scholarship or is claiming a tuition credit.

It is reasonable to expect TurboTax (TT) to recognize  the various scenarios and report the distribution correctly, on the tax forms. TT can do this, but it helps for you to have some idea of the outcome.  As @Opus 17  explained, in your scenario 40% of the earnings are taxable (as you indicated, reported on Schedule 1). In addition, TT should claim the scholarship penalty exception by completing  form 5329.  With your "solution" to send part of the distribution to the student-beneficiary, this happens on his return, instead of yours.  And yes, he can do that. It does not matter whether he is is your dependent or not. 

Q.  How do I enter this scenario, in TT?  

Tuition $10,000 paid by scholarship

Room & Board $15,000

$25,000 529 withdrawal, by parent-owner (Earnings  portion $10,000)

Neither student or parent will claim a tuition credit

A. First enter the 1099-Q. Later, in the educational expenses section, enter the 1098-T. Answer yes when asked if you have any book expenses (that gets you the screen to enter room & board).  The 1098-T should have $10,000 in box 1 and $10,000 in box 5. That tells TT that the tuition was covered by scholarship and the  $10,000 non qualified portion of the distribution qualifies for the penalty exception. 

 Be on the look out for a screen titled “Amount Used to Calculate Education  Credit”. 

TT does not "sense" that you do not qualify for a tuition credit so it frequently allocates expenses to the credit (sometimes $4000 but usually $10,000).  Change the prepopulated amount to $0. 

Here's a quicker workaround (or if you run into a snag above). Rather than entering the 1098-T later: at the 1099-Q interview, when asked who the beneficiary is, answer someone not listed here. Then enter your son's name at the next screen.  That will get a you a simpler screen to enter expenses, in the 1099-Q interview.  There are several screens before you get there, including one asking for the level of school the student attended. After entering the expenses, be sure to enter the offsetting amount at "Adjustments: Tax-free assistance" (scholarships). 

[bill_321]

Thank you very much for the detailed response and the how to aspect of it..

The reason I think the 529s could do it is because when I make a withdrawal they asked me to specify what sort of withdrawal it is and have around eight choices. They could have a choice that addresses the type of withdrawal were discussing.  

Of course that's only useful if the IRS made changes to the format of the 1099-Q.

So they do know, in the sense that they asked me. For example they do ask the qualified withdrawal, a non-qualified withdrawal etc.  but that info doesn't show up on the 1099 q.

Regardless, I really appreciate the detail.