You do not have to enter any of the information from 1099-Q on your Tax Return for 2016 if the distribution paid for tuition in 2017. As strange as this may sound, the IRS does not require taxpayers to include the information from 1099-Q unless a portion of the Distribution becomes Taxable. When you have an excess distribution you must include the portion of the earnings proportionately attributable to the expenses as Other Income on your return. Unless other Circumstances are present an additional 10% tax is also applied to this amount.
The most ideal situation would be that your Qualified Education Expenses equal the exact amount of your Distribution. In the real world that is usually not the case. When Higher Education is involved additional expenses are most likely. This presents an ideal situation especially if the student qualifies for the American Opportunity Credit. The excess amount spent on Qualified Education Expenses can be attributed to the American Opportunity Credit. You are also allowed to consider a portion of the distribution for the American Opportunity Credit. The portion that you elect to use for the American Opportunity Credit will still be taxed as other income but you will not be subject to the Additional 10% Penalty.
With distributions from Coverdell ESAs and College Savings Plans good recordkeeping is the name of the game. Since the IRS does not require one to substantiate the expenses it creates the potential for a very tough situation if your return is examined by the IRS.
