Student loan repayment from 529 plan

[m67j66]

Where does TT capture the information to record a loan repayment made from a 529 plan? On the section on income where it queries about cashing in EE bonds and expenses from a 529 plan? Or someplace else?

[Anonymous_]

I'll page @Hal_Al 

[Hal_Al · Accepted solution]

Q. Where is this information captured in TT?  What section (s)?

A. In TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

  --ESA and 529 Qualified Tuition Programs (1099-Q)

The interview will eventually present the loan payment question. There is no short cut, you have to go thru the 1099-Q interview. 

[m67j66]

Does that produce the form 8815 for exclusion of interest income?

[Hal_Al]

Q. Does that produce the form 8815 for exclusion of interest income?

A. No. But, you don't need or want form 8815. It  is not applicable to this situation. 

Form 8815 is ONLY for the exclusion of U.S. Savings bond interest, when savings bonds are cashed in a year that a student has had  tuition paid.  In fact, there is no IRS form for reporting when 529 distributions are used for education, including student loan payments.  This is a problem; the IRS gets a copy of the 1099-Q and may not know that the taxpayer used the money for qualified educational expenses.  We've seen several postings, in the forum, from parents who have received IRS inquiries about their 1099-Q. It happened to me, personally.  

At least two users reported that they replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They  later received a notices saying they were in the clear. In my case,  just sending copies of school statements satisfied the IRS. We have noticed, here in this forum, that the number of 1099-Q notices, from the IRS has dropped off significantly in recent years. The IRS does also get a copy of the 1098-T, so they should at least know that the beneficiary is a student.

[m67j66]

OK. Right.  But I also have the situation you mention---I cashed in EE bonds, put the proceeds into various 529 plans and took some for personal use.  I paid estimated taxes on the interest portion of earnings for the personal use portion. I made tuition payments with some of the 529 accounts and just augmented the others, so I need to know where and how that gets captured so I can exclude paying taxes on the redeemed EE money that went into 529s.  For this I will need the 8815 form.   Thanks.

[Hal_Al]

You got a form 1099-INT for the savings bond interest. 

In TurboTax (TT), enter the 1099-INT at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Interest & Dividends

  -Interest on a 1099-INT

Check the box that says you have more than box 1interest.

The savings bond interest is in box 3. That will cause TT to generate the education interview.  When prompted for the educational expenses, you enter  the amount of the bonds (not just the interest) that you rolled over to the 529 plans.  For the purpose of the savings bond interest exclusion, 529 plan contributions qualify as education.  Do not enter other expenses like tuition, room & board or loan payments, that comes later in the 1099-Q interview (and/or the 1098-T interview, for some people). 

[m67j66]

OK. Thanks.  I'll let you know if I run into any problems.  I have been using TT for years but this is the first time having to cope with EE redemption and paying off loans in the same year.

BTW, looking over your responses to others as well, you really seem to know your stuff and communicate crisply and clearly.  Thanks for that.

[m67j66]

Ok Hal.  I took a break for a couple of days since your reply and this morning have entered trial balloon data for the EE bonds cashed and educational expenses in TT.  Did not get the result expected or hoped for and I don't understand why.  Total of Bonds cashed is $62,208 of which 47,208 was interest.

As per your last message, I entered the EE savings bond interest ($47,208) in Box 3 under the Investment/Savings section of TT. This led to the question about whether savings bonds were used to pay for higher ed expenses to which I replied YES since rolled into a QTP.  Then checked the questions about bonds issued after 1989, 24 yrs old, and in our names. This leads to screen where you list all the students info.  THEN, I get to screen asking for education expenses where I enter as qualified expenses the $48,000 I rolled over into 529 plans. Then TT asks for more info on EE bonds-- entered :  total received= 62,208, face value at issuance=30,000 (but bought at 15,000 thus the $47,208 interest). Next screen says 'Looks like you don't get a tax break".  WHAT?  I thought EE bonds rolled into 529 plan was exempted.  What is going on?

[m67j66]

Well this thread is more now about excluding interest from a EE bond redemption than repaying loans from a 529 plan.  I think I may have found the answer to my problem.  It appears likely now that redeeming $62K of EE bonds has pushed us over the interest exclusion limits for the form 8815 so that we get no exclusion.  Too bad. C'est la vie.

[Hal_Al]

Q.  It appears likely now that redeeming $62K of EE bonds has pushed us over the interest exclusion limits for the form 8815 so that we get no exclusion.  Is that right?

A. Yes. The $47,208 excluded interest is added back to your AGI to calculate the Modified Adjusted Gross Income (MAGI) that determines your eligibility.  The calculations will be shown on form 8815. 

I label this a "gotcha" they didn't emphasize when they sold us (yes, they got me too) savings bonds for future education 20 years ago.