I am a Head of Household filer and have two minor children in K-12 private school, for whom I take annual distributions from their respective 529 plans, of which I am the plan owner and they are the designated beneficiary, and pay for their tuition. The tuition total is greater than the $10,000 limit for K-12 education, so I expect to pay income tax and the 10% Additional Tax on the proportional earnings portion of the excess distributions. In past years, when I claimed both children as dependents, and Turbotax has calculated the tax exactly as I expected.
This year, for tax year 2021, one of my children will be claimed as a dependent by their other parent and, therefore, will appear in my return as a non-dependent. That change (from having the designated beneficiary on the 1099-Q as a dependent in past years to a non-dependent for 2021) has Turbotax calculating zero income tax or Additional Tax for the earnings portions of the excess distributions for that child. While this would be a pleasant surprise, it doesn't seem consistent with the tax code. For fun, I've swapped the children as dependent and non-dependent, and the result is consistent; the dependent child's excess distributions get calculated as I expect and the non-dependent child's excess distributions do not get taxed at all. I've also tried to force the worksheets for the non-dependent child to match what I expect the tax to be, but those fields aren't editable by me.
I'm looking for ideas... Am I missing something in the way I'm entering the data into Turbotax? Am I missing a pleasant surprise in the tax code? Or might this be an edge case that Turbotax doesn't handle as expected?
When you enter the Tuition and Enrollment Fees for the non-dependent, please limit that entry to 10,000.
Only 10,000 of Elementary and Secondary education expenses can be claimed per student per tax year.