1099-q and 1098-t

Question

Hi, we received three 1099-q's.  My wife was the recipient on one and my daughter was the recipient on the other two.  My daughter is a freshman in college and is the beneficiary.  We also received one 1098-t.  My daughter works and made $11,500.  I file jointly with my wife.  I will also file a return for my daughter separately.  Do we file just the one 1099-q with my wife's name as the recipient on my return with my wife?  Do I file the other two 1099-q's with my daughters name as the recipient on my daughter's return?  Do I enter the 1098-t on both?  I was unaware of the AOTC - American Opportunity Tax Credit and we used our 529 to pay for her entire tuition and room and board, so I will not be eligible for the tax credit.  Please let me know if anymore information is needed. Thanks for any input!

Hal_Al · Accepted Answer

Provide the following info for more specific help:

Is the student the parent's dependent. yes
Box 1 of the 1098-T $18443.00
box 5 of the 1098-T $14288.00
Any other scholarships not shown in box 5 no
Does box 5 include any of the 529/ESA plan payments (it should not) no
Is any of the Scholarship restricted; i.e. it must be used for tuition yes, it had to be used to tuition
Box 1 of parent's 1099-Q $1599.92
Box 2 of parent's 1099-Q 340.29
Box 1 of students' 1099-Q #1$8615.00
Box 2 of student's 1099-Q #1 $5876.84
Box 1 of students' 1099-Q #2 $443.96
Box 2 of student's 1099-Q #2 $99.23
Amount of High School tuition $3851.00
Room & board paid during college. If student lives off campus, what is school's R&B charge. $4810.00Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers books $444.00 (also bought a computer, but it was not required by the school $1350.00)
How much taxable income does the student have, from what sources $11511.00 (earned income, she has a job)
Are you trying to claim the tuition credit (are you eligible)? yes, but not eligible for full credit (our AGI $178840.00)

I sounds like you knew what you were doing. The numbers balance near perfect. All three 529 distributions are fully covered by qualified expenses, including the computer*. Do not enter any of the 1099-Qs on either tax return. Doing so will most likely lead to mistakes (you situation is too messy for allocated entries).

There is enough tuition left over to claim the AOTC. But, you won't get much (less than $300) because your income is near the top of the income phase out range. Enter the 1098-T on your return. Don't bother to enter any other numbers (books etc) they aren't needed and/or were used for the 1099-Q. Do not enter the 1098-T on the student's return.

* Yes. A computer is a qualified expense for calculating your tuition credit. For a full discussion see:

https://ttlc.intuit.com/community/college-education/discussion/is-a-computer-a-qualified-expense-for-aotc/01/1452208/highlight/false#M32372

https://ttlc.intuit.com/community/college-education/discussion/re-education-expenses-question-computer/01/2803482#M48545

Hal_Al · Answer

You can still claim the AOTC, unless your income is too high*. That may result in paying a little tax on one of the 529 distributions. You may or may not have to enter the 1099-Qs. If you do, yours's go on your return. Your student' s goes on her return. The 1098-T may go on both returns, if needed. See below for details.

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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.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. 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 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)

-$3000 paid by tax free scholarship***

-$4000 used to claim the American Opportunity credit

=$3000 Can be used against the 1099-Q (usually on the student’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

You have $1120 of taxable income

**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.

________________________________________________________________________________________

*What are the income limits for AOTC?

To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).