Can I include my daughter 1099-Q non-qualified distributions in my tax return.

[slamny]

If I claim my daughter as dependent when I file my tax. Can I include her $6980 of non-qualified 1099-Q distributions from 529 with a gain of $3490 in my return? If I can, do I also have to include her summer wages of $6000 and interest bonus of $600 in my return? Or does she has to file her own return? Or she does not has to file at all?

[Hal_Al · Accepted solution]

Q. Can I include my daughter 1099-Q non-qualified distributions in my tax return?

A.  No.  If she is the "recipient" (her name and SS# are on the 1099-Q), then it must be reported on her tax return.  At the time you requested the withdrawal (distribution), you had the option of sending the money to you (the owner) or her (the beneficiary).  That was the time to make that decision. 

Q.  If I can, do I also have to include her summer wages of $6000 and interest bonus of $600 in my return? 

A.  No. If her only income was interest, there is a provision for reporting a dependent's income on your return. But since she has both wage and "investment income" (the distribution), the income must go on her return. 

Q. Does she have  to file at all?

A. Yes, because of the $3490 income on the 1099-Q.  See full rules below the line.

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You do not report his/her income on your return. If it has to be reported, at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2022 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,950 (2022) ($13,850 2023).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable earnings on a 529 distribution) of more than $1150 (2022) ($1250 2023)
3.          Unearned income over $400 (2022) and gross income of more than $1150 (2022) ($1250 2023)
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,950 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

If his only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814. 

[TomK2023 · Accepted solution]

Maybe.  Form 1099-Q reports distributions and benefits from Coverdell education savings accounts and 529 plans. It's reported on the tax return of the person whose Social Security number is on the form.

She should file her own tax return showing her income and interest (if only to get any Federal tax withheld back).  It also establishes a record of those earnings for Social Security purposes.  Be sure that she indicates that she is listed as a dependent on someone else's return (her parent(s)).

Please see this TurboTax FAQ for instructions on Where do I enter a 1099-Q?

[Hal_Al · Accepted solution]

@slamny  Did your student receive any scholarships?  If the scholarship was unrestricted (it did not have to be used for specific items, usually tuition), she can declare some of her scholarship as income to free up some educational expenses to allocate to the 529 distribution.  Taxable 529 earnings (gains) are "unearned income".  Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  

Making this option may lower her overall tax and 10% penalty. 

______________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

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

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

[slamny · Accepted solution]

Let say next year, If the condition of my daughter only has summer wages of $6000 without any interest bonus and no Federal or State taxes witheld. There is still a $6980 non-qualified 529 withdraw with earning of $3490 from 1099-Q.

Tax benefit saving wise, is it better to have the 1099-Q address to me with my name and SS#, so I can include it in my tax return? And, she doesn't have to file the tax return of $6000 summer wages? 

[Hal_Al · Accepted solution]

Q. Tax benefit saving wise, is it better to have the 1099-Q address to me with my name and SS#, so I can include it in my tax return? 

A. No.  There is some slight tax savings if  the 1099-Q is addressed to her  with her SS# (she is the recipient).  The first $400 will not be taxed . The next $1250 of unearned income will be taxed at her lower tax rate.  Then the  "kiddie tax" (the unearned income is taxed at the parent's marginal rate) will kick in.  But you'll have the cost* and hassle of the 2nd tax return. 

That's brings up the question: Why are you taking non-qualified distributions?  There may be other options available, rather than paying tax and penalty. 

Q. And, she doesn't have to file the tax return of $6000 summer wages? 

A. That's correct, if she has no other income and does not need withholding refunded.  Your state may have a lower filing requirement (most don't). 

*If you buy the TurboTax download (instead of using TT online), you can do additional returns at no additional cost (but no free state e-file). 

[slamny · Accepted solution]

The reason I took out non-qualified distributions, because my daughter is going to State College and her tuition is paid by the State scholarship. Since, there is an sum of amount in 529 and no other beneficiary I have in mind, with rule in 529 that I can withdraw same amount of tuition without penalty, so I decided to take out in that way.

Is any other suggestion you can recommend?

Any information on 529 to Roth IRA conversion?

[Hal_Al · Accepted solution]

Q. Is any other suggestion you can recommend?

A. You appear to know about the main two: 1. Change the beneficiary to another relative and 2. Roth IRA rollover. 

Q. Any information on 529 to Roth IRA conversion?

A. Some restrictions apply.  For details, see:

https://www.cnn.com/cnn-underscored/money/529-to-roth-ira#:~:text=As%20of%202024%2C%20the%20followin....

You said "her tuition is paid by the State scholarship". I assume that means the scholarship must be used for tuition (restricted scholarship).  So, you can't use the taxable scholarship shifting of expenses. 

Room and board are qualified expenses for a 529 distribution, even if living off campus or at home. Books and a required computer are also qualified expenses. Books and a required computer are also qualified expenses for a tuition tax credit, if you otherwise qualify (your income is not too high). 

You are correct, the 10% penalty is waived for the scholarship exception (or tuition credit exception). 

[slamny · Accepted solution]

Question, under your CNN referral link to convert 529 to Roth IRA, it mention "The 529 plan must be under the beneficiary’s name for a minimum of 15 years". The only beneficiary is my daughter and is over 15 years, so she is qualified. But, can I add myself as beneficiary now and qualify for that, or I have to wait until 15 years later to qualify? And, by any chance do you know, "The lifetime 529 to Roth IRA rollover limit is $35,000", is it per account or per beneficiary? Thanks.

[Hal_Al · Accepted solution]

Q. But, can I add myself as beneficiary now and qualify for that, or I have to wait until 15 years later to qualify?

A. I think that's pretty clear, you'll have to wait another 15 years.  I'm in the same situation. I plan to fund my son's Roth IRA and have him reimburse me only the tax adjusted value. 

Q. Do you know, "The lifetime 529 to Roth IRA rollover limit is $35,000", is it per account or per beneficiary?

A.  No, I don't know for sure, but everything I read seems to say beneficiary.  Here's an article that seems to say that question is not clear in the act.  https://www.putnam.com/advisor/content/wealthManagement/7131-secure-2-0-creates-new-backdoor-roth-op...

[slamny · Accepted solution]

Question. In the Putnam.com link you posted. It mention about "The 529 beneficiary who is receiving the transferred funds in a Roth IRA is subject to the same earned income requirement that applies to all IRA contributions". Is that true? Because, It doesn't mention on the other CNN link. 

If it is corrected, since this Act is starting 2024, then the beneficiary must have at least $7000 earned income in 2024 to take the benefit of transfer? Or, does it count for 2023 earned income?

[Hal_Al · Accepted solution]

Q.  In the Putnam.com link you posted. It mention about "The 529 beneficiary who is receiving the transferred funds in a Roth IRA is subject to the same earned income requirement that applies to all IRA contributions". Is that true (It doesn't mention on the other CNN link)?

A. Yes.

Q. Then the beneficiary must have at least $7000 earned income in 2024 to take the benefit of transfer?

A.  Yes and no. Yes, it must be 2024 earned income. But, there is no minimum. For example: if she makes $2000 in a part time job, she can roll over as much as $2000. She's not allowed to roll over the maximum $7000, because she did not have $7000 compensation (earned income). 

Q. Or, does it count for 2023 earned income?

A. No. 

Here are two more articles on the subject:

https://www.kiplinger.com/retirement/retirement-plans/529-plans-get-a-boost-with-tax-free-rollovers-...

https://www.journalofaccountancy.com/news/2023/mar/saving-college-new-529-to-roth-irs-transfer-rule.....

[slamny]

Sorry, I miss to ask a question. The 1098-T addressed to my daughter with her name and SS#. Since the 1099-Q is address to her with her SS#, should it file on her tax return? Or I can use it to file on my return?

[TomK2023]

Form 1099-Q reports distributions and benefits from Coverdell education savings accounts and 529 plans. It's reported on the tax return of the person whose Social Security number is on the form.
 

[Hal_Al]

Q. The 1098-T addressed to my daughter with her name and SS#. Since the 1099-Q is address to her with her SS#, should it file on her tax return? Or I can use it to file on my return?

A. The 1098-T is only an informational document. You use it wherever it's needed or you don't use it at all.  

Provide the following info for more specific help (I know some of it was already provided, but it'll be helpful to have it all in one place):

• 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 on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• 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
• Are you trying to claim the tuition credit (are you eligible, income not too high)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?