529 qualified withdrawal for non-dependent

[529recip]

I withdrew $5500 from a 529 account to cover my married daughter's graduate school tuition.  1) Do I or does my daughter enter the 1098-T information?  2) If she enters that information, how do I show a qualified education expense on the 529 account - so that I am not taxed on the $5500?

[Hal_Al]

I assume your daughter is the beneficiary of the 529 account. I further assume the 1099-Q is in your name and SS# (you are the recipient).

The 1098-T is only an informational document and doesn't go on anyone's return. So the question is who gets the educational expenses. Answer: you both do but you cannot double dip.

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 ( on the student's return in this case)

 =$3000 Can be used against the 1099-Q ( on the parent-recipient'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) 

*you may claim room & board even if she lives off campus. Use the school's charge rate for on campus students unless you know her actual cost is less.

[sgiitb85]

I am in a similar situation and would really like further clarification on the response.

I have a daughter in college and I have a 529 with her as the beneficiary. However, the 1099-Q is in my name.

Usually I claim her as dependent and also claim the 529 and the expenses on my tax forms. However, this year it might be beneficial for her to file her own tax return and claim the stimulus check.

So if she files her own tax returns, I cannot claim her as a dependent. Does she then file 529 income and education expenses on her tax form? Also, can she then also qualify for American Opportunity Tax Credit?

[Deb3805]

Hi - I'm in a similar situation for 2022.  My daughter does not qualify as a dependent. But like you I have a 1099-Q for funds I withdrew from her 529 account to pay for qualified educational expenses for her.  Just wondering how you resolved this situation?

[ZhuoliA]

If the Distribution doesn’t exceed the amount of the student's qualifying expenses, then the distribution is not taxable, and you don't have to report any of the distribution on your tax return.

Please see this TurboTax article for more information.

[Deb3805]

Are you saying I don't need to report the withdrawal at all?  Even though I got the 1099-Q with my SS on it?  I would think that would raise a red flag with the IRS.

[KrisD15 · Accepted solution]

It depends on whether the funds were used for education expenses. 

IF THEY WERE, the distribution is not taxable, and you either don't report it 

OR 

enter it into the TurboTax program in which case you will be asked what the distribution was used for.

In your case, you would choose "Education expenses for someone else not on this return" and that would be the end of it, it would not be reported. 

If you did not use for education expenses, you will enter the 1099-Q and answer that it was not used for education expenses, in which case it will be reported as taxable income on your return. 

Of course there is more to it. 

IF it was used for education expenses for someone not listed as your dependent, you will need to get together with the student and make sure the expenses you are allocating to the distribution is not also used by the student.  Education expenses can go towards scholarships, OR distributions OR  other tax-free assistance OR education credits, but they can only be allocated once. 

Why are you making distributions when you are not the student? If nothing else, transfer the funds to the school so the 1099-Q will be properly issued to the non-dependent student. 

[Deb3805]

My daughter (the benficiary) is a full time student at a tech school.  I pulled money from her 529 account to pay her tuition directly to the school.  Then I bought her a laptop and printer to use and pulled money from the 529 account to reimburse myself.  I also had monthly payments sent from the account to her landlord each month for the rent as the tech school does not offer housing.  The total for the computer, printer and rent came to just over $3600, which is the gross distribution on line 1 of the 1099-Q.  The earnings (line 2) are $2,846 and the basis (line3) is $754.  There were other distributions that were sent directly to her, some QEE, some not.   All of those appear on her 1099-Q.  Those figures will be reported on her tax return.

Just to reiterate, I don't need to report ANY of the 1099-Q figures (or related expenses) on my tax return?  Or should I indicate that I COULD claim her as a dependent (even though I'm not), report the gross distribution per the 1099-Q, and then report the expenses?  Either way should give me the same result.  I'm just worried that if I don't report it I might get a letter from the IRS.

Lastly, I don't understand your last suggestion - transfer the funds to the school so the 1099-Q will be properly issued to the non-dependent student.   

[Hal_Al]

Whether she is a dependent or not is totally irrelevant, for the 529 distribution(s), as long as she is the beneficiary of the 529 Plan.

As others have said, You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board  to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for her to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You & she cannot double dip!  So, you have to coordinate the expenses allocation with her.

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge. You cannot claim all the rent paid, you're limited to school's R&B charge
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Is she  trying to claim the tuition credit (is she eligible)?
• Is the student an undergrad or grad student?
• What is her age as of 12-31-22?

Here's a side issue: You say she is not your dependent. Money from a 529 plan, where you are the owner and she is the beneficiary, is considered support you provided and not her supporting herself 

[KrisD15]

"Lastly, I don't understand your last suggestion - transfer the funds to the school so the 1099-Q will be properly issued to the non-dependent student."

I mean, for future distributions,  if the account administrator is advised to send payments directly to the student's account at the school, the 1099-Q will be issued to the account beneficiary (the student), not the account owner.   

The IRS would like forms to be matched and would like a computer to be able to match those forms. 

NORMALLY the student gets a 1098-T from the school showing all the payments.

NORMALLY distributions are made by the student, and the 1099-Q is issued to the student so a match to the 1098-T (expenses) is easily made. 

NORMALLY a student does not supply more than half their own support (scholarships don't count as their own support) so 

NORMALLY the student is claimed as a dependent on the parent's return, the parents might get an education credit for the dependent student and again an easy paper trail for the IRS. 

You are indicating that the student is not your dependent and you took at least one distribution to pay for supplies, you don't say if the rent distributions were on your 1099-Q. 

Regardless, this is making a mess for the IRS to easily match, but there is not much you can do at this point. There is no way of adding a letter of explanation with your 1040. 

If the distribution was used for education purposes, it is not reportable/taxable income. All you can do is keep records, receipts, and the student's school account statement with your and your daughter's tax file. 

If the IRS asks, you'll then need to provide that paperwork to them.  

Additionally, if the student qualifies as your dependent, you CAN elect to not claim her, but in that case she would need to file as a dependent.  The IRS determines who is a dependent, not Taxpayers, so you might want to readdress that if necessary. 

@Deb3805

[Deb3805]

I haven't actually claimed my daughter in several years.  She started this program last May at the age of 25.  Prior to that she was working and paying all her own expenses.  The tuition for the program was sent from the 529 account directly to the school.  She is in off-campus housing as the school doesn't offer any. 

The $2000 withdrawal was made directly to me to cover a laptop and printer that I purchased for her.  The rent for Sep-Dec was sent directly to the landlord ($1600).  Apparently since it didn't go to the school or to her, they included it in my 1099-Q along with the $2000.  All other withdrawals (around $10k) went directly to her so she could pay for groceries and utilites as well as rent for the months I didn't send it directly to the landlord.  I am the owner of the 529 account and she is the beneficiary.  Given all this, it doesn't seem like I would qualify to claim her as a dependent, unless all the money sent directly to her would count.  

Bottom line, I entered everything into Turbo Tax; the 1099-Q information and the detail as to what the money went towards.  Now I see that those figures only appear on supporting schedules and not on any forms that are actually filed.  And there is zero impact on my taxable income.  So I think I'm good!  I'm just surprised that the IRS doesn't require you to report this information.  

Thanks for everyone's help with this!

[Hal_Al]

Q. And there is zero impact on my taxable income.  So I think I'm good! 

A.  Yes.

Q. I'm just surprised that the IRS doesn't require you to report this information?

A. Excellent observation.  We've seen numerous posts, in this forum, where users have gotten notices from the IRS that coulda been handled by by an IRS form, for this situation. Because you went thru the effort, you will have the TurboTax worksheet to send to the IRS if you get a notice. 

As to the dependent issue, you haven't mentioned your daughter's income. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related).  She cannot be a QC because she is over 23.    

A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

1. Closely Related OR live with the taxpayer ALL year
2. His/her gross taxable income for the year must be less than $4400 (2022).
3. The taxpayer must have provided more than 1/2 his support. As mentioned earlier, 529 money is counted as support from the owner, not the beneficiary. 
4. He must be a US citizen or resident of the US, Canada or Mexico
5. He must not file a joint return with his spouse or be claiming a dependent of his own
6. He must not be the qualifying child of another taxpayer

The Other dependent (qualifying relative) credit is worth (up to) $500 per dependent and is non-refundable.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

You also don't mention if your daughter will be claiming a tuition credit.  If she does, she may have to make some adjustments to how she allocates the expenses for her 1099-Q.  But, you should still be good on your tax return. 

[Hal_Al]

The education credit can be as much as $2500 and requires the allocation of only $4000 of tuition (unless she is a grad student).  Only $1000 of it is refundable.  So, depending on her (and your) income it may only be worth $1000 to her and possibly $2500 to you, if she qualifies as your dependent. 

[Deb3805]

Good things to consider - THANKS