1098-T and 1099-Q - 529 questions

Question

Greetings,Please help with 529expenses.Filing status (parents): Filing jointly.Child fulltime college Tuition & boarding: Part paid from 529 and rest from out of pocket,1098-T and 1099-Q both issued under child name.1099-Q gross distribution is less than 1098-T Box1. Box 5 1098-T has scholership amount. 1. As 1099-Q on child name, although child is dependent, do I need to enter this information on my tax form? if so, under what section in Federal form?2. For my state Tax form (CT) can I enter 1099-Q Gross distribution as 'Education Trust Fund Distributions"? ------------------3. If it is not required to enter on my tax form (1&2)   Do my child need to file tax return and enter this information (Note: Also made about $1500 as summer intern (2023) but not required to file taxes).

mglauner · Accepted Answer

Neither the 1099-Q or the 1098-T are required to be entered into your tax return.

If your 1099-Q disbursement was entirely used for Education Expenses, you don't need to enter it; just save it for your records.

If Box 1 (Tuition) on the 1098-T is larger than Box 5 (Scholarships), you may qualify for an Education Credit, so should enter this in your return.

It's usually not beneficial for the student to report any education stuff in their return, as they won't qualify for the full Education Credit. Plus they may not be required to file a return anyway.

In Connecticut, an Education Trust Fund Distribution refers to CHET. CHET is a state-sponsored, tax-advantaged 529 college savings plan that's helping families and individuals plan for the cost of higher education, so this is particular 529 plan that may not apply to you.

Here's more info on Form 1099-Q and instructions on How to Enter a 1098-T.

.

Hal_Al · Answer

Q1. As 1099-Q on child name, although child is dependent, do I need to enter this information on my tax form?

A 1. No. The student is the "recipient" of the distribution. See below.

Q2. For my state Tax form (CT) can I enter 1099-Q Gross distribution as 'Education Trust Fund Distributions"?

A 2. No. None of it is taxable

Q 3. If it is not required to enter on my tax form, does my child need to file tax return and enter this information.

A 3. No. None of it is taxable.

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”.

_____________________________________________________________________________________________

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.

You 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 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 regardless of whose money was used to pay 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. A student, with no other income, can have up to $13,850 of taxable scholarship (in 2023) and still pay no income tax.