If I enter data from & about a 1099Q Fam Ed Savings Acct distribution in Fed Income portion of TurboTax, will TT pull the appropriate data into my state Tax Return?

[jeffreywiest]

In 2018 I took the complete distribution from a Montana Family Education Savings Account (“FESA”) that I had set up for my youngest daughter about 20 years ago.  The total amount pulled out of that account in 2018 was a little more than $21K, $2.7K of which was interest

I used about $8K of that distribution to pay for a trade school that my daughter attended in December 2018, and I gifted her the remaining money from the FESA. 

I received a 1099-Q from the bank that had administered the FESA in January 2019, and I entered the data from that form into TurboTax Deluxe when preparing my 2018 Federal Tax Return.  I also entered the amount of money spent on the trade school when TT prompted me to do so.  TurboTax used that information and placed it into my Federal return in a way that made sense to me - I saw my income increase by the amount of interest that had not been used for education, and my refund dropped accordingly.

However, I want to confirm that TT used the information regarding the FESA correctly when it prepared my Montana return.   Specifically, I don’t see where TT shows the amount of FESA money that was not spent on school coming into my Montana return.   Further, I expected to see my Montana tax libility increase significantly because of the FESA money that was not spent on education, but it didn’t seem to.  Is there somewhere in TT Montana where I need to report the FESA distribution, or does TT Montana import that information from the Federal portion of the TT file.

Second, in the “wrap-up” questions for my Montana return, TT Montana asked if I had any Montana recapture tax or withdrawal penalties to report, and one of the bullet items under that question was Family Education Savings Account recapture tax.  Is the recapture tax being asked about something that I would have received a notification of, or do I have to go somewhere and calculate a recapture tax or withdrawal penalty - the reason I ask is that I would have expected TT to calculate such a tax automatically based on the information I entered in the Federal portion of the FESA / 1099-Q data?

Mostly, I want someone to tell me that TurboTax automatically used the information that I entered from the 1099-Q and about my daughter’s education expense when preparing my Montana Tax Return.

[KrisD · Accepted solution]

The Montana return starts with the Federal Adjusted Gross Income and the taxable portion of the distribution is already in that figure. 

Your situation with the distribution has nothing to do with recapture. 

"Recapture" happens when you take a credit for something, and then are refunded or reimbursed the next year. For example, say you paid 5,500 in home mortgage interest in 2017, and took that amount as a deduction on your 2017 Schedule A, but then in 2018, the Lender realized they made a mistake and they refund you 2,000. You would need to refigure your 2017 tax return using 3500 interest and "recapture" the difference, if any. 

[jeffreywiest]

Thanks so much - your answer was clear and exactly what I was hoping for!