Entering ESA and 529 Info Through 1099-Q Into TT

[dlk8433]

I'm using the interview in TT, walking through each section. In the Deductions and Credits section, under the Education topic, TT asks me if I received 1099-Q's. I did and entered their info. Something didn't look right. I switched to Forms, looked at schedule 1 and all the money I entered somehow is taxable, and is showing up as other income on 1040, line 8. Yikes! I have had kids in college for a few years and entered 1099-Q info in TT using the interview last year, too. I looked at last year's return and the amount on 1040, line 8 there is $0. Note that the interview has not asked me anything about 1098-T's yet. For the ESAs, I am the owner and receive statements as "me FBO my child". For the 529s, I am the recipient, but box 6 is checked ("If this box is checked, the recipient is not the designated beneficiary"). What am I doing wrong? Thank you in advance.

Addendum: I forgot to mention that the next screen in the interview process says, "Your modified AGI exceeds the maximum, but you should enter your education expenses to avoid paying taxes on your ESA or 529." This didn't happen last year. I was counting on the education tax credits (Am Opp Act, etc) for credits. What happened?

[Hal_Al · Accepted solution]

Q. Note that the interview has not asked me anything about 1098-T's yet?

A. You do not enter educational expenses in the 1099-Q section.  In TurboTax (TT), initiate the Educational expenses and scholarships section to enter the 1098-T.

Q. "Your modified AGI exceeds the maximum..... This didn't happen last year?

A.  

• To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

Q.  I was counting on the education tax credits (Am Opp Act, etc) for credits. What happened?

A. You probably just need to enter your expenses. But the interview can be complicated due to various scenarios.  Sometimes, you may need to use a workaround.

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. 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 you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

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." 

________________________________________________________________________________________

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 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 (usually on the student’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

You have $1120 of taxable income  

**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. 

[dlk8433]

@Hal_Al Thank you so much for the deeply detailed answer. I will try to understand what you wrote. I'm not an accountant; just a guy trying to do his taxes. It seems so needlessly complicated. I feel defeated. Thanks again.

[Carl]

I have found that when you have a 1099-Q involved, it's important to work through the education section the way it's designed and intended to be used. If you do not, there is a high possibility that you will not be asked for deductible 1099-Q expenses, such as room & board costs.

[Hal_Al]

You must enter the 1099-Q before you enter the 1098-T or TT will not give you the room & board entry point. Even then, To get the screen to enter Room & Board, answer yes when asked if you have book expenses.

[dlk8433]

@Hal_Al 

I read through your detailed response, continued the interview, entered 1098-T info and substantially reduced the tax owed. So, thank you. I'm not getting the American opp or Lifetime Learning credit for one of the kids. I entered a large room and board expense for her (lives in NYC), but it had no effect on reducing taxes. I looked at its specific help and it said, "generally not deductible, unless you used 529 or ESA to pay room and board." Of course, I used her college funds for room and board. How do I tell TT that?

[Hal_Al]

Review the student information worksheet to see what expenses have been allocated to the 529 distribution. 

The TurboTax interview is complicated. One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. This will also be shown on the  student information worksheet. 

If you know that none of the 1099-Q is taxable, you should just delete it, as explained above.

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. 
• 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)?
• Is the student an undergrad or grad student?

[dlk8433]

@Hal_Al 

Provide the following info for more specific help:

• Are you the student or parent. PARENT
• Is the  student  the parent's dependent. YES
• Box 1 of the 1098-T   $50,990.50
• box 5 of the 1098-T   $36,455.00
• Any other scholarships not shown in box 5  NO
• Does box 5 include any of the 529/ESA plan payments (it should not) NO
• Is any of the Scholarship restricted; i.e. it must be used for tuition scholarship applied directly to her total charge for each semester (tuition, university fee, etc)
• Box 1 of the 1099-Q  There are two: one from ESA ($14,722), one from 529 ($27,886)
• Box 2 of the 1099-Q ESA (blank), 529 (Box 2 "earning" $12,825.80)
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? ESA (student), 529 (me)
• Room & board paid. If student lives off campus, what is school's R&B charge. School RB charge: $16,876
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers $600
• How much taxable income does the student have, from what sources  None
• Are you trying to claim the tuition credit (are you eligible)?  ?? Trying to claim either the Amer Opp or Lifelong Learning, whichever saves more
• Is the student an undergrad or grad student? Undergrad

[Hal_Al · Accepted solution]

Scholarship + ESA distribution + 529 Distribution = $79,063 which is $10,596 more than your expenses (50,991 +600 = 16,876= 68,467).  Plus, you want to allocate $4000 of tuition for the AOC. Something has to be taxable. You have to decide what.  TurboTax cannot handle this without you knowing how to enter it.  You may want to consider having you tax return done professionally.

That said, it can be done.  Here's how I would do it.  First have the student report $12,950 of taxable scholarship on his return (I conclude the scholarship is not restricted since it was applied to the overall bill).

His standard deduction will wipe that out, so none is taxable.*

Then decide whether to report the ESA distribution or the 529 distribution.  To do that you need to calculate the earnings portion of the$14,722 ESA distribution**. The ESA administrator may be able to help . You will not enter the 1099-Q that will result in the most tax and only enter the other one.  You will use $4000 of tuition to claim the AOC.  I quick calculate that only   $1646*** of the distribution will be non qualified. So, for the 529 distribution: 1646 / 27886 = 5.9%.  0.059 x 12,826 =$757 taxable income. You do a similar calculation for the ESA distribution (1646/ 14,722 = 11.2% x earnings). It's probably not going to make much difference. 

*scholarship is treated as earned income for purposes of the standard deduction calculation for dependents. 

**TurboTax can do this on the 1099-Q worksheet. You need your basis and account value as of 12-31-22. 

***14,722 +27866 - [68,467 - 4000 -(36,455-12,950)] = 1646

[Hal_Al]

The above reply was edited.  It appears that it won't make much difference whether you report the ESA or 529 distribution.  Since the 1099-Q for the 529 is in your name (and will go on your return), reporting it will make the entries easier. 

[dlk8433]

@Hal_Al 

Thank you again for all the help. Doing as you suggested, I moved the ESA info, where my daughter is the recipient, to her return. This included the 1099-Q and the 1098-T. Taxes dropped substantially and I received the maximum, $2,500, for the Amer Opp tax credit. I owe money this year, but I think that's the best I'm going to do. 

Since she is a dependent, her standard deduction is very small. She has a $79 tax bill. Oh well.

[ny1301]

hi Hal_AI,

I have read your detailed answer. Thank you very much!

My situation is very much like the original parent's, but my question is a bit different: I entered both 1099-Q and 1098-T, and I got about $1500 extra tax compared with when I didn't enter 1099-Q and 1098-T !

• Are you the student or parent.   -- parent.  (student is my dependent, but she files her own return because she has taxable income of 17k)
• Is the  student  the parent's dependent -- yes
• Box 1 of the 1098-T.   -- 61,680.5
• box 5 of the 1098-T.    -- empty
• Any other scholarships not shown in box 5.  -- no
• Does box 5 include any of the 529/ESA plan payments (it should not).  -- no 
• Is any of the Scholarship restricted; i.e. it must be used for tuition.  -- no
• Box 1 of the 1099-Q  -- 68,000
• Box 2 of the 1099-Q  -- 46,900
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?  -- Parent
• Room & board paid. If student lives off campus, what is school's R&B charge.  -- about 12,000
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers. -- no
• How much taxable income does the student have, from what sources.  -- 17,000 from internship, reported on her own return
• Are you trying to claim the tuition credit (are you eligible)?   -- no. AGI greater than 180k
• Is the student an undergrad or grad student?   -- undergrad

I actually have 2 kids in college. The other kid does not have income, so does not file her own tax return. I don't know if that makes any difference than the above kid in terms of 1099-Q and 1098-T.  I am not asking for any other education credit: I just want to avoid paying extra tax when I use 529 to cover my kids' tuition and boarding.

Your help is greatly appreciated!

[ny1301]

just want to clarify that the extra cost is about 73k(box1 on 1098-T + 12k boarding), and I've entered it on 1098-T interview questions.

[Hal_Al]

@ny1301  You have no scholarships or tuition credit to deal with so this is real easy. Don't enter either the 1098-T or the 1099-Q. Save yourself the hassle of trying to make TurboTax come up with the answer you already know: none of it is taxable. 

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. 

If it's really important to you to get the worksheet that TT produces; this work around is simpler. Instead of entering the educational expenses in the education expenses section, enter it in the 1099-Q section of TT. The workaround is: when asked who is the student, check "someone not listed here" (Lying to TurboTax to get it to do what you want does not constitute lying to the IRS). On the next screen, enter the real student's name.  This will eventually give you one simple screen to enter all expenses. 

[ny1301]

That worked! Thanks!