Prevent 1099Q 529 transfer from getting treated as extra income on AL State form 40.

[fox44448888]

I got a 1099Q because I transferred funds from one 529 state (Virginia) account to another 529 state (Alabama) account, for the same beneficiary.  I did it immediately (within 60 days).  I indicated in the turbo tax federal section that 1) this distribution rolled over to another qualified tuition program, 2) to the original beneficiary, and 3) for the entire amount of the distribution.

In my AL state taxes, it is now treating this distribution as extra taxable income.  From my research, AL does not tax a distribution if it was rolled into another qualified AL 529 fund.  It was not treated as taxable income in Federal, and I'm pretty sure that should be the same case for Alabama.  

This question affects the following on the AL state return:

• Form 40, line 7
• Form 40, part I, line 6f
• Form 40, part I, line 7 

Is there something I'm doing wrong? Is there any way for me to correct this such that I'm not taxed on the rollover?

[AmyC]

You get a credit, not tax. 

AL does not tax the rollover. The federal does not tax the rollover. Since it is not taxable, the IRS says not to include the Q in your return. You do want to keep the Q and your paperwork trail showing it is not taxable.

AL actually allows you a deduction for contributions to AL 529 which includes rollover amounts. You can claim a deduction up to $5,000 or $10,000 MFJ. Be sure to enter your deduction for your AL College Counts 529.

As you go through the AL state program, look for Did you contribute to an AL 529 College Savings Plan? Enter your allowed amount.

[fox44448888]

Thank you for confirming that AL does not tax the rollover!  Also, thank you for pointing out the AL 529 deduction!  I have that entered in! 

I am still having an issue of TurboTax putting the transfer on Form 40, Part I, line 6f "Taxable distributions from non-Alabama Plan (Form 1099Q)." The amount being put onto that line is the Total transfer minus the basis (i.e., total gain).  

I looked for a credit that would cancel it out, but I don't see any credits getting applied.  There is the adjustment to income of $10k due to the AL 529 contribution deduction.  But that's all I see.

Since this should not be taxable, how do I make TurboTax stop putting it on the taxable line?  

Thanks!

[AmyC · Accepted solution]

Remove the Q from your return. IRS Publication 970, Tax Benefits for Education states that nontaxable distributions should not be entered.

It is not taxed at the federal or state level and should not be entered. I am glad you found the credit. Welcome to AL!

[fox44448888]

Exactly what I needed to know! Thank you!