He does. And you are correct, you claim the 1098-T. Full explanation follows. 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 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 QTP. 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 (usually on the student’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
**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!
I have a similar situation where my son received a 1099Q from 529 payments to the school in his name. Gross distribution was $12K, with $7300 as a basis and $4700 in earnings. Of the $12K distribution, $1400 was a refund to my son from the school for him to pay for books/supplies. The 1098T in his name reported $7K in block 1. I'm looking to also use either the American Opportunity credit or Lifetime Learning credit on my tax return without double dipping. In the above example, why do they use $4K to claim the credit. I thought the credit was for $2500.
The maximum American Opportunity credit (AOC) is $2500. But it takes $4000 in expenses to qualify for the $2500 max. credit.
The Lifetime Learning credit (LLC) is a max of $2000, but it takes $10,000 of expenses to get the max
Thank you. Using my example of $12K in total educational expenses for the year, how do I determine if there's enough expenses to use both the 529 distributions and the educational credits without double dipping?
First we need to know your qualified expenses. It appears you had $7000 in tuition and fees and $1400 for books and course materials, I'll assume the other $3600 (12000-7000-1400=3600) was used for room and board.
If you claim the AOC, you use $4000 for the AOC and $8000 for the 1099-Q. 8000/12000 = 67%. 0.67 x 4700 = $3133 of the earnings are tax free. You have $1567 of taxable income (4700-3133).
If you claim the LLC, you use $10,000 for the LLC and $2000 for the 1099-Q. 2000/12000 = 17%. 0.17 x 4700 = $800. You have $3900 of taxable income (4700-800)
You cannot use the AOC or LLC without giving up some of the tax exclusion (benefit) of the 529 plan.
Is there a big difference between a 529 plan and a 529 prepaid tuition plan in qualifying for AOTC. Prepaid plans exclusively pays the tuition first, regardless of grants or scholarships.
Yes, but. My son doesn't file taxes. His earned income is well under 12 k. Does he HAVE to file taxes to report his 1099 Q?
One tax advisor told me that I can just not report it in my return. Sounds like ill advice.
No, you do not have to file a return to report the 1099-Q. As long as the funds were used for qualified educational expenses. The 1099-Q is to be reported only on the return of the person whose social security number is on the 1099-Q. Funds distributed from a 529 Plan, will be reported by the bank on Form 1099-Q. The 1099-Q is sent to the owner/recipient of the 529 Plan funds. The Form 1099-Q is to be reported as income if they were not used to pay qualified college tuition/expenses. If the amount reported on the 1099-Q were used to cover qualified college tuition/expenses you do not need to report the income. If the amount exceeds the amount of college tuition/ expenses then the excess needs to be reported as other income on your 1040.
If your son is not required to file a tax return, you would not need to report the excess unless the excess in combination with his other income would put him over the filing requirement and make it to where he would be required to file a return.
You do not have to report the 1099-Q on your taxes as it was issued in your son's name and social security number.
The person you talked to that said you do not have to report it at all is correct. as long as there is no excess income from the distribution.
I have been assuming we enter our son's 1099Q's (1 for his 529, he is the recipient and 1 Coverdell where I am the receipient and he is the FBO) on our tax return. When I do this, Turbotax tells me we do have a small amount of taxable income that needs to go on the student beneficiary return. Where and how do I enter this? And am I wrong that I can enter the 1099-Q's on our return?
Did TurboTax say that there were 'taxable earnings' or 'taxable scholarship income' to report on your son's return?
For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. If you know the 529 distributions were all used for qualified education expenses, you could delete them from your return. Or, at least delete the 1099-Q issued to him, as he would report that on his return (if he is required to file a return).
If your son received a 1098-T, after subtracting Scholarships in Box 5 from Tuition in Box 1, is there enough expenses left to cover the 1099-Q distributions?
If you also qualify for the AOC, then 4K of expenses goes toward qualifying for this credit, which may then cause some of the 529 distribution to be taxable.
Or, if his Scholarships exceed Tuition, he may have some taxable scholarship income to report (if he is required to file a return).
Click this link for more info on Form 1099-Q.
Here's more discussion on Taxability of 529 Distributions.
My son got a 1099-Q with a distribution of $29,000. $14,000 of that was used in Fall 2022 in qualified educational expenses and $15,000 was used in January 2023 for Spring 2023 classes. Does he need to pay income taxes on the $15,000? He transferred to a different school in January and it was not until the first week of January that the expenses were recorded but the distribution was made in December.
No, as long as you can match expenses to the distribution, the student does not need to claim any of the distribution as taxable income.
REMEMBER to adjust the expenses on the 2023 1098-T to reflect what you are taking for the 2022 distribution.