529 qualified vs non qualified differentiation

Forum|Forum|4 years ago
February 3, 2022
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We have a 529 for our son who is in college. We have always used the 529 for qualified education expenses. However this year, because we had we an excess in funds, we decided to do a non qualified withdrawal of 529 funds. We know we will have to pay a penalty and income tax on the Earnings of the portion we withdrew. We received a 1099Q form which showed the total 529 funds withdrawn and the total earnings. We got one form, so that includes the qualified and non-qualified grouped together. When I enter the information into Turbo Tax, it doesn't give me a way to say how much of the total is qualified vs unqualified. How do I do this? Plus the recipient (beneficiary) is my son for the qualified education expenses, but for the unqualified portion they sent my wife a check, since she is the custodian of the account. Trying to figure out how it will know to only take a penalty and income taxes on the non-qualified portion, if it doesn't know what that portion is. And lastly my son has never file a return since he is only in college and doesn't work. Does he have to file a return because of the 1099Q? We have always just done all the taxes under our joint filing for my wife and I. I know lots of questions, but I haven't seen a question answered like this.

Thanks

AmyC

Level 15

Since the 1099-Q is being used for qualified expenses under you and your wife, you do not enter the form. Delete the 1099-Q.It is not required, see Publication 970, Tax Benefits for Education.

Since your son is the beneficiary, he will enter the 1099-Q on his tax return first, then enter the 1098-T and qualified expenses. The remaining portion will be the taxable amount.

In addition:

Instructions for Form 1099-Q (Rev. November 2019) - IRS
Remember, 529 qualified expenses includes room and board. If the student is living off-campus, the cost of room and board must not exceed the allowance for room and board in the college’s student budget for students living off campus.
Ways to File your Taxes with TurboTax For Free

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gpklosAuthor

Level 2

So it sounds like I have to do a return for my son then even though he doesnt have a job or any income? It is interesting that turbo tax never complained about entering this information. It just let me enter it on our return even though the beneficiary is our son.

Since the 1099q only specifies my son but my wife was the beneficiary of the non qualified; it seems as if my son will be the one that will be taxed and penalized for the non qualified 529 withdrawals. Is that correct?

From what I have read we should still put the 1098t on both returns?

Thank you.

MarilynG

Level 15

No, you would only enter the 1098-T and the 1099-Q on one return; either yours or your son's.

If he is not required to file a return, you could enter both on your return. The advantage to reporting on your son's return would be the lower tax rate for him on the taxable portion of the earnings on the 1099-Q (and 10% penalty), rather than on your return.

The only reason for him filing this year (unlike prior years) is that some of the distribution is not covered by Education Expenses this year, so there will be taxable income.

You could figure it both ways to verify.

Look at the Student Information Worksheet, Part VIII, Line 4, which will show any excess distribution amount. This amount is then multiplied by a factor relating to the % of the distribution that is qualified (total distribution/qualified portion), resulting in a taxable amount on Line 8.

Click this link for more discussion on Reporting Form 1099-Q.

This article has general info on 1099-Q.

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