1098-T

Question

I have a 529 account that I use to pay for my granddaughter's tuition. She is the beneficiary of the account, but she is not my dependant. I received a 1098-T with my granddaughter's name on it . It says it's a tuition statement, Copy B for student.

Is this an expense or deduction, and who should report it (me or granddaughter). It came to me, would she have gotten one also?

Hal_Al · Accepted Answer

My understanding was that the 1098-Q is tax free since it only includes the tuition paid to the school, which I fully recovered from the 529 account. So I am claiming the 1098-Q.

I don't know where the information for the 1098-T came from. If I claim the 1098-Q, can she claim the 1098-T and what would she need to justify that. Does she need to itemize books, computer, etc. Their income is certainly under $180,000, but the school is more of a Tech associate school, so I believe all students are off site.

Q. My understanding was that the 1098-Q is tax free since it only includes the tuition paid to the school, which I fully recovered from the 529 account?

A. Yes, the 1098-Q is tax free, but not because it "includes the tuition paid to the school". It is tax free because the student had sufficient educational expenses, of any kind, including food & shelter (room & board). "I believe all students are off site". Off site student's living expenses are still qualified room & board.

Q. If I claim the 1098-Q*, can she claim the 1098-T?

A. Yes, she can and should.

Q. What would she need to justify that.

A. Mostly just the 1098-T. She enters that on her tax return, to claim the tuition credit. The TT interview will allow her to add any book, etc. expenses.

Q. Does she need to itemize books, computer, etc. ?

A. Not at tax filing time. She would only need that if audited. The books, computer, etc are only a small part of the tuition credit. The bulk comes from the 1098-T.

*You "claim" the 1099-Q by NOT entering it on your tax return. Repeating from above: "On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

You have now determined that your distribution is not taxable. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms.

Hal_Al · Answer

Q.Is this (form 1098-T) an expense or deduction, and who should report it (me or granddaughter)? It came to me, would she have gotten one also?

A. The 1098-T, from the school, was not sent to you. It may have come to your address, but it was sent to the student. It's always sent to the student. The 1099-Q from the 529 plan is another story. It is sent to the recipient (see below the line for a full explanation).

If she is the recipient (her name and SS# are on the 1099-Q), she reports the 1099-Q on her tax return, if it even needs to be reported. In most cases, it does not.*

The 1098-T goes on either the parent's return or the student's depending on whether she is their dependent. The family needs to decide how to allocate educational expenses for the best tax benefit. See below.

*You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!

References:

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

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Qualified Tuition Plans (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

The parent can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you (the parent) can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)

-$3000 paid by tax free scholarship***

-$4000 used to claim the American Opportunity credit

=$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.