For a cancelled education tuition program (1099-Q), why is Turbotax treating distribution amount as income without subtracting basis first?

[sbaajohnson1]

Taxpayer is the owner and paid for plan with after-tax dollars.   Beneficiary chose not to go to college.  Taxpayer cancelled plan and received refund.  TurboTax is not reducing the reportable income by the amount paid. Shouldn't the taxable amount be the distribution less basis?

[JaimeG · Accepted solution]

You are correct, the earnings (Box 2 in 1099-Q) from the Distribution are what becomes Taxable. In this case your Gross Distribution should be the entire balance of the account. This means that the entire amount of Box 2 will be included as Other Income on your Tax Return. Additionally, since the Distribution was not used for Qualified Education Expenses an additional 10% tax penalty is applied to the taxable earnings.

If it has not been 60 days since you received this money you can still roll it over into another account and name a different beneficiary without tax consequence.