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Level 1

Solved

529 qualified withdrawal for non-dependent

Forum|Forum|7 years ago
June 5, 2019
2 replies
0 views

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?

TurboTax Premier Online

Best answer by KrisD15

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.

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

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.

Hal_Al

Level 15

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

Level 4

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

Level 4

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?

Hal_Al

Level 15

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:

Closely Related OR live with the taxpayer ALL year
His/her gross taxable income for the year must be less than $4400 (2022).
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.
He must be a US citizen or resident of the US, Canada or Mexico
He must not file a joint return with his spouse or be claiming a dependent of his own
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.

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.