Do I need to enter data from 1098-T and 1099-Q if I have sufficient educational expenses and too high an income for credits?

[Catmomm3]

My daughter started college in Fall 2021. She got a $5000 scholarship to cover her tuition.

Form 1098-T has

Box 1=$11,500 (this seems to include tuition, room, board, meal plan and other fees the school collects)

Box 5 = $5000

The remaining $6,500 was paid by a check sent directly from my 529 to her college. The 1099-Q for this  has her name on it. (Her 1099-Q actually has $13,000 because the 529 plan mailed the Spring check in late December, but the school didn't receive/apply it to her account until January. Based on other replies, I conclude that as long as I have the records, I should be good and I will try to time it better next year.)

Other expenses for books, computer, lab supplies, etc = $2000. These were initially paid by credit card and reimbursed from the 529 plan to me (the parent). The 1099-Q for this amount has my name on it.

Our income (my husband and I) is too high for the education credits.

Since we can't get any education credit, the scholarship was fully used for education expenses, and the 529 disbursements were fully used for educational expenses, do I need to enter any of this into Turbo Tax, since none of it should be taxable?

I believe that I don't need to enter the 1099-Q information based on other posts, but wasn't sure if the 1098-T must be entered.

[Hal_Al]

Q.  Do I need to enter data from 1098-T and 1099-Q if I have sufficient educational expenses and too high an income for credits?

A.  No. Both are  informational documents. The numbers on it are not required to be entered onto your tax return. 

Furthermore, 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."  

[Hal_Al]

Box 1,  of the 1098-T, is only suppose to include tuition and fees. Schools are not suppose to include room and board.  Books should also not be included, unless they were part of the course fee/tuition.  

[michaeljulieorta]

@Hal_Al you are a TT rock star. I see you've helped many people with these college expense questions. Why is it so incredibly complicated? Ugh!! I think our family is in a somewhat similar situation as the above. But I'm so confused. Here goes.

Our dependent son started university in Fall 2021. The 1098-T shows $11,246 received by the university in box 1 for qualified tuition and related expenses (not room and board) for BOTH Fall and Spring semesters. It also shows the $7,395 (box 5) he received in Fall scholarships ($6,154 of which was applied to Fall "tuition and related expenses," leaving $1,241 to be applied toward Fall room and board). Because our married-filing-jointly income exceeds $180K, TT says we cannot submit the 1098-T. QUESTION: Is that okay? We're not seeking the education tax credit, but doesn't TT need to know those amounts to correctly calculate our tax burden/credits? And does the $1,241 mentioned above count as income for our son? (He didn't make enough in 2021 to file.)

Form 1099-Q shows the $15,713 distributed to us from our 529 plan. $8,318 of that was for qualified education expenses (e.g., room and board), and $7,395 of it was to reimburse ourselves for his $7,395 scholarship (noted in box 5 of 1098-T). The total of $15,713 appears as income initially, but then also appears as a deduction. However, the earnings on that $7,395 scholarship reimbursement 529 distribution was $3,486. I know we need to pay taxes on those earnings related to the scholarship-equivalent distribution. QUESTION: How will TT know about that? Where do we enter the $3,486 earnings portion of that distribution in TT?  

I just want to make sure we're entering this info correctly. I've even deleted the forms and re-started them, but I still get the feeling something is not right.  Thanks in advance for your assistance. If we're still stumped, my wife will want to hire a CPA which we've happily and easily avoided for 12+ years, thanks to TT.  

[Hal_Al]

On your return, just don't enter the 1098-T and/or 1099-Q.  It's too complicated  and TT has flaws. You have more than enough expenses to cover the 1099-Q. 

You're trying to breakdown the numbers more than they need to be.  Your expenses are $11,246 + 8318 = 19,564* and that's more than the $15,713 529 Plan distribution. Since you're not claiming the tuition credit, that's all there is to it for your return. 

On your son's return, he has 19,564 - 15713 (used for your 1099-Q) = $3851 of qualified expenses for his scholarship.  $7395 -3851=  $3544 scholarship is taxable.  If that's his only income** and it's less than the $12,550 filing threshold, he does not need to file (or enter the 1098-T).

For more detail on 529 Plan distributions, see https://ttlc.intuit.com/community/college-education/discussion/re-why-is-my-college-student-paying-t...

*You don't mention books and required computer, which can increase those expenses.

** If he has other income  from wages, the $12,550 threshold still applies.  If he has unearned income over $350, it gets a little more complicated.

[michaeljulieorta]

@Hal_Al thanks for your response! I think I need to clarify something. You said our expenses are $11,246 + 8318 = 19,564. That is what the university received. But we only paid $8318 to the university. The rest was covered by scholarships. We then withdrew the value of the scholarships ($7395) from the 529 for us to keep (returned to us since the scholarships covered that). Put another way, the university received $8,318 from us and $7395 from scholarships, to total $15,713.  So we withdrew $15,713 from the 529 to match. So don't we owe taxes on the earnings portion ($3486 according to 529 statement) of the $7395?    

[Hal_Al]

Q.  So don't we owe taxes on the earnings portion ($3486 ) of the $7395?   

A. No, because we have chosen to make the scholarship taxable*, instead of the 529 distribution, by the allocation of expenses.  I have assumed the scholarship is not restricted to tuition (most are not).  

You're getting bogged down in details of trying to match expenses to specific payments. That's not required. It doesn't matter what funds actually paid for which expense. 

You don't allocate the money sources, you only allocate the expenses.  There are three things you can do with your Qualified educational expenses (QEE):

1. Use them to claim an education credit
2. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable
3. Allocate them to scholarships (so that the scholarship remains tax free)

You don't have sufficient expenses  to make both the scholarship and the 1099-Q tax free.  So, we allocate the expenses for the best tax effect. As a result, the student needs to declare $3544 of scholarship as income.  But, you get to claim the AOC and the 1099-Q is tax free (and not reported).

*You want the scholarship to be taxable before the 529 earnings because taxable scholarship is treated as earned income while the 529 is unearned income.  A dependent's standard deduction is calculated on his earned income, so effectively less income is subject to actual tax.