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LAFH2024

Solved

1098T and 1099Q Questions

Forum|Forum|1 year ago
April 14, 2024
2 replies
0 views

Hello, I am trying to prepare our taxes and help my college student kids with their taxes. (1) If a person is not eligible for federal income tax credits, can you just omit entering the information on the 1098-T in Turbotax and your tax return for both the parents and kids? (2) if you have determined that part of the earnings for the QTP distribution are taxable because your distribution exceeds the cost of attendance estimate of the college (due to off campus lodging expenses that exceed the college's cost of attendance estimate), I am wondering how you enter the calculation in Turbotax and your return? For example, $17,000 gross distribution (Box 1), $2,000 earnings (Box 2) and $15,000 basis (Box 3). Let's say $1,000 above cost of attendance so 50% of the earnings are taxable and 50% tax-free earnings. The only thing I see in TurboTax are fields to enter the figures from Box 1, 2 and 3, but not a field to enter your calculation on how much is taxable as illustrated in IRS publication 970 of how to calculate. If I enter these 3 fields on my kid's taxes, Turbotax calculates the gain on the full Box 2 Earnings. I feel like I should enter these 3 fields to match the 1099-Q which is also sent to the IRS. Very confused! Thank you for reading my question and any guidance is truly appreciated!

Best answer by Hal_Al

Hi Hal_AI,

You asked for a detailed list of answers to questions. Here are my responses.

I am the parent, but I also am helping the college students with their returns. I have two college students that both have 529 plan distributions. Therefore, I have a married filing jointly return to work on and I am assisting on two dependent, college students returns that each file as single.
Both student's are dependents of the parents.
Student 1: Box 1 of 1098T is $9,347.87 and Student 2: Box 1 of 1098T is $4,771.59
Student 1: Box 5 of 1098T: $0, Student 2: Box 5 of 1098T: $0
Student 1: No scholarships, Student 2: No scholarships
Box 5 does not include any of the 529/ESA plan payment for Student 1 or Student 2
There are no scholarships for either Student 1 or Student 2
Box 1 of the 1099-Q for Student 1: $17,143.89, Box 1 for the 1099-Q for Student 2: $8,677.46
Box 2 of the 1099-Q for Student 1: $1,975.65, Box 1 for the 1099-Q for Student 2: $1,055.14
The name and SS# on the 1099-Q are in Student 1 and Student 2
Rom & Board are paid, Student 1 lives OFF campus in a rental nearby, the schools R&B on campus charge are Housing $4,423 and Food Plan $2,922. Student 2 lives ON campus and goes to the same school so the Housing of $4,423 and Food Plan $2,922 are the same cost of attending figures. Therefore, neither student lives at home because the school is too far away in another part of the home state.
Other qualified expenses not included in Box 1 of the 1098-T do not apply. Books included in cost and computer also used for personal use. The problem is Student 1 off campus lodging and food expense is greater than the cost of attending college amounts.
Student taxable income: Student 1: W-2 $5,839.21 plus EE Savings bonds that were redeemed, but spent by the student (all college costs paid from 529 plan) the amount of interest of EE bonds was $82.54, Student taxable income for Student 2: W-2 $6,509.71, plus EE Savings bonds that were redeemed, but spent by the student (all college costs paid from 529 plan) the amount of interest of EE bonds was $43.72
We are not trying to claim the tuition credit
Student 1 and Student 2 are both undergrads
Both student 1 and Student 2 are degree candidates that attend school more than half time, full-time in fact.

Thank you so very much for helping me!

Student #2 has sufficient expenses that none of the distribution is taxable. Just don't enter the 1099-Q*.

Student #1 has $451 of non-qualified distribution. $451/ 17,144 = 2.63% of the distribution is non qualified. 0.0263 x $1976 earnings = $52 taxable income (and subject to the 10% penalty). It won't get taxed since he has so little other income, but you have to do the paper work to pay the $5 penalty. If you bought a computer, during the term, and it was used for school, it is a qualified expense, even if there was other personal use. If you're going to enter it, be advised it easy to make mistakes. The alternate "someone else not listed here" method describe above is advised.

*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.

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”.

KrisD15

First, if the students are your dependents, and you want TurboTax to do the math, enter ALL 1099-Q and 1098-T in your TurboTax program and your program will tell you what (if anything) the students need to claim.

If there is taxable distributions, the person listed on the 1099-Q is liable for that tax.

If you want to do the calculation, the taxable portion of the distribution is-

(this will need to be done for each student separately)

Total of all expenses less scholarships =XXXX

Earnings times expenses (XXX) divided by distribution = tax-free portion (XX)

Earnings less tax-free portion (XX) = taxable earnings

You can enter this calculation as "Other Income" on the return(s).

Pub 970 is pretty easy to read and has some great advice.

It even talks about having the student claim income in order to free up an education credit for the parents.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

LAFH2024Author

Hi KrisD15, thank you for your prompt reply and I appreciate your help. The problem is by completing boxes 1, 2 and 3 the return in TurboTax is reflecting the entire earnings amount as taxable income. I am concerned about entering "Other Income" and potentially increasing the taxable income further since it is already overstated. I typically see TurboTax using an "interview approach" where questions are asked to prompt the ability to add further information. When I switch to "Forms" Mode, I can see the return and fields, such as 2d which asks for Total Qualified Educational Expenses Attributed to the QTP, under Qualified Tuition Program (QTP) Computation of Taxable Distribution on the worksheet. I do not receive any prompts in "Step by Step" mode to enter the information to populate this field in "Forms" mode. I am tempted, but concerned about entering the information in 2dwhile in "Forms" mode because there may be other questions or fields to consider. I am not sure why there is not a prompt in "Step by Step" which allows the user to walk through the process more thoroughly to characterize the transaction more accurately. Should I enter the amount in field 2d since it is the only thing I have found that seems to reflect this additional detail of how much are the total qualified education expenses? Thanks again for your help!

LAFH2024Author

I also want to mention that the 1098-T only shows the cost of tuition and not room and board. From what I understand, the college's calculation of overall cost of attending college should be used as the guideline when calculating qualified expenses for tuition, fees, housing, and food. If I just enter the 1098-T it looks like we are way over the qualified expenses. Furthermore, I believe this informational form is used for the purpose of helping students with federal income tax education credits, such as the American Opportunity Credit and Lifetime Learning Credit. This is why I was wondering if I should enter it and if it is required? The 1098-T and the 1099-Q are both in the student's name. It might be fine and proper to enter it if I can get a field such as 2d to work and accurately list the total of qualified education expenses. I hope what I am trying to explain is clear. Thanks again!

Hal_Al

Employee

Q. If a person is not eligible for federal income tax credits, can you just omit entering the information on the 1098-T in TurboTax (TT) and your tax return for both the parents and kids?

A. Yes. The 1098-T is only an informational document.

Q. For example, $17,000 gross distribution (Box 1), $2,000 earnings (Box 2) and $15,000 basis (Box 3). Let's say $1,000 above cost of attendance so 50% of the earnings are taxable and 50% tax-free earnings.

A. It doesn't work that way. If $1000 of the distribution is non qualified, the math goes like this:

$1000/ 17,000 = 5.88% of the distribution is non qualified. 0.0588 x $2000 earnings = $118 taxable income (and subject to the 10% penalty).

Q. How to enter that in TT?

A. Theoretically, you enter the 1099-Q in the 1099-Q section and the 1098-T in the Educational expenses section and TT figures it out. That seldom works. Here's the short cut:

Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there. . You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to apply the penalty.

LAFH2024Author

Hi Hal_AI, I appreciate the clarification and help! If I understand correctly, I should enter the box 1, 2 and 3 information, from the 1099-Q, on the dependent student's tax return which in my example above would have the full earnings amount in Box 2 be taxable earnings. The tax and penalty would be applied at the student's lower tax bracket. Then, as the parent, I should enter the 1099-Q on my return by using your TurboTax trick to get it to report the Educational expenses correctly and this would allow us to take the deduction? We should also enter the 1098-T on our tax return even though it is issued in the student's name? Another question, if we have very few deductions, and we are getting the standard deduction for married filing jointly, should we even add the 1099-Q and 1098-T on our tax return?

Hal_Al

Employee

Q. Then, as the parent, I should enter the 1099-Q on my return by using your TurboTax trick to get it to report the Educational expenses correctly and this would allow us to take the deduction?

A. What deduction? You said earlier you weren't eligible for federal income tax credits.

Q. Another question, if we have very few deductions, and we are getting the standard deduction for married filing jointly, should we even add the 1099-Q and 1098-T on our tax return?

A. The 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

The tuition credit is a direct reduction in taxes, not just a deduction. 40% of it (up to $1000) is even refundable. You don't need to itemize to get it.

You're asking piecemeal questions, all over the place.

Provide the following info for more specific help:

Are you the student or parent.
Is the student the parent's dependent.
Box 1 of the 1098-T
box 5 of the 1098-T
Any other scholarships not shown in box 5
Does box 5 include any of the 529/ESA plan payments (it should not)
Is any of the Scholarship restricted; i.e. it must be used for tuition
Box 1 of the 1099-Q
Box 2 of the 1099-Q
Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
How much taxable income does the student have, from what sources
Are you trying to claim the tuition credit (are you eligible, income under $90K, 180K married)?
Is the student an undergrad or grad student?
Is the student a degree candidate attending school half time or more?

___________________________________________________________________________________________

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.