529 qualified vs non qualified differentiation

[gpklos]

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  We received a 1099Q form which showed the total 529 funds withdrawn and the total earnings.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]

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

[gpklos]

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. 

[MarilynG1]

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.

[gpklos]

Ok i will leave both forms off of our joint return and just put it on our son'a return. Thank you.  Your answers have been very helpful.  

[gpklos]

Something else I just noticed.  So I filled out my son's form, which made sense.  However there is a form for Tax for Certain Children Who have Unearned Income.  It asks if you have a child with unearned income more than $2200 in the age range of 19-23 and their earned income did not exceed one-half of their support.  Since my son claimed the 529 non qualified withdrawal it counted as unearned income.  And then it asks for the parents total taxable income.  Apparently it is using that number to decide on the tax rate.  So instead of the 529 non qualified distribution being taxed at my son's rate, it is being taxed at our rate.  Something about the "kiddie" tax.  By doing that we now owe a lot more.  Does that sound right?  I'm getting so confused.

Thanks

[KrisD15]

First of all, the purpose of a 529 plan is to pay education expenses for the student who should also be the Beneficiary. 

Distributions for education should ALWAYS be made in the name of the student. Direct transfers to the school will be reported in the name of the student as well. This way the 1099-Q is issued to the student, as it should be. 

If the owner takes a distribution for something other than education expenses, that 1099-Q will be issued to the owner. 

Most owners of a 529 Plan do not follow this procedure. Parents make the distribution and pay the education expenses, or in your case, use some funds for education and some funds for something else. 

When the student is a dependent, the person claiming the student should enter the 1099-Q, 1098-T and all other information regarding education expenses of the student into their (parent's) TurboTax program so that the TurboTax program can do the math. 

If there is tax due on the distribution, that tax will assessed on the Taxpayer who was issued the 1099-Q. 

If the tax is due to the student, the parent's TurboTax program will say how much the student needs to report. 

In your case, since the 1099-Q was issued to the owner, the owner (parent) would be liable for the tax. 

Keep in mind that if there are expenses to cover the distribution, the program may take those expenses and put them against the 1099-Q OR use them for a credit. When you click "Maximize My Tax Break" the program will figure the best allocation. 

You can type   letme   into the search-box to change the credit if you are eligible for more than one. 

Tax is only on the Earnings portion of the distribution. 

IRS Pub 970 is fairly easy to read (for an IRS publication) and has a lot of great information and tips. It might be worth you looking it over. 

IRS PUB 970

[gpklos]

Actually the 1099q was issued to the student (my son) along with the 1098t. If that makes a difference. That is why I was filing taxes for my son separately. Because both forms were in his name. Even though we took the non qualified distribution they lumped the entire distribution (qualified and non qualified) into one 1099q. 

[KrisD15]

Yes, you can still enter the forms into your TurboTax program and your program will tell you if your son needs to report income from that distribution. 

Are you getting any Education Credits? 

Do you have expenses such as Room and Board to allocate towards the distribution? If the student had to study remotely, did you supply meals? Did the student need a laptop and internet service? 

Did the student get any other aid?

The additional tax is waived if:

"3. Included in income because the designated beneficiary received: a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1); b. Veterans' educational assistance (see Veterans' Benefits in chapter 1); c. Employer-provided educational assistance (see chapter 10); or d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. This exception applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier)."

Because it is a complicated subject, it is best to enter everything into your program and get the result that way. Then report the income on the students return if necessary. Yes, the student may be subject to the "Kiddie tax". 

[gpklos]

The only aid he got was his scholarship. Outside of that, that is it.  Looks like I will have to go with the kiddie tax. Just seems a lot for the 14000 non qualified distribution to cost 5250 dollars in penalty and income tax.  Without being marked as kiddie tax it was around 2500.  That kiddie tax I guess pushed it into our tax bracket which is higher obviously. 

Hopefully the last question. If I do it with putting both forms on our joint return, it will say our son needs to report the tax on his return. So then I have to put those forms on his return anyways so the calculation is correct.  Correct?  Since I have to put it on his there seems to be no reason to mention them at all on mine.  I'm sure these seem like stupid questions. 

[KrisD15]

Perhaps it would work out better if the student claimed some scholarship income and the 1099-Q went all to education expenses? It could save you the additional tax on the distribution. 

According to the IRS:

"You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received."

How you report any taxable scholarship or fellowship grant income depends on which return you file. Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1."

[gpklos]

Thank you for all your help!!  I helped a lot!  

Gary