The web TurboTax is coming up with a tax for qualified withdrawal from a 529 plan
I am the account owner of 529 plan and my son is the benefactor. I cannot claim my son as dependent on my tax filing for another reason. He is a full-time student in 4-year college bachelor's degree. His tuition for 2024 is $23,703 and his expenses (such as room and board) are $11,377. So, the overall expense is $35,080. He has scholarship of $8,000 that is paid towards his tuition. Hence his real tuition cost is only $15,703. So, his 1098-T contained $15,703 in box 1 and $8,000 in box 5. It has both boxes 7 and 8 are checked.
I withdrew gross distribution of $20,129.78 (of which $7,599.35 is earnings and $12,250.43 is basis) from this 529 plan. I am the receiver of the withdrawal funds, and I paid funds towards my son's college expenses (tuition & expenses). Rest, I paid out of my pocket. On my 1099-Q form, the 529 plan account type is State (box 5) and the box 6 is checked (because I received the funds, but the beneficiary is my son). This is Arizona state 529 plan.
I tried tax filings in web turbo tax in following 2 different ways:
1) When I entered both 1098-T for my son and 1099-Q from 529 plan on my tax filing in TurboTax (and answered questions appropriately), it increases my tax by $3,570
2) When I entered them on my son's tax filing in TurboTax (after getting warned that this has no tax implications for student) (and answered questions appropriately), it says following.
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Looks like your 1099-Q is taxable
Based on the education expenses you've entered, the student beneficiary must report $3,304 of taxable income from this distribution.
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This is totally not what I expected. Why does it differ in both cases? Why is there a tax for me? Why is there a tax for my son?
What I don't understand is that total college expense for my son is $35,080d but I only withdrew $20,129.78 which is less than college cost. There should not be any tax at all. What am I missing?