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Solved

1099-Q and 1098-T Question

Forum|Forum|1 year ago
March 5, 2025
3 replies
0 views

My son (non-dependent due to gross income over $5,050) has a 1098-Q from our 529 plan distribution (I am the owner) and a 1098-T from his qualifying school that we used to pay for his undergraduate eduction in 2024. Both the 1098-Q and the 1098-T have the exact same gross distribution (for the 1099-Q) and payments received (for the 1098-T).

I do not understand why his return (as he is not considered a dependent and it's all in his name, we are including this info. on his return) is calculating earnings on the 529 as additional income. Since the distribution from the 529 went 100% directly to the school and was used for tuition and fees, shouldn't this be considered a tax free use of the 529 plan?

I can't seem to figure out how to make this work in Turbotax. All I can get at this point is some kind of offset credit for $4,000 which then brings a portion of the earnings from the 1098-Q box 2 into his taxable income for 2024.

I've read a lot about this and tried to resolve on my own, but now reaching out to the community for some help.

Best answer by Hal_Al

Thank you for the explanation. I was thinking there might be an error with Turbotax. To be clear (and I might not have been before), I have answered the questions as follows:

Personal Info. Worksheet, Part II:

question 1 - "CAN another taxpayer (such as your parent) claim you as a dependent? - Answer "yes"

question 2 - "If 'yes' to Q1, are you actually claimed as a dependent on that person's tax return? - Answer "No"

If I answer Q2 as "yes" then he loses the AOTC ($2,500) and his refund goes to a payment. That swing is way more than the $500 credit I would get on my return for Other Dependents.

Lastly, and I keep reminding myself to continue to ask about this, why is he getting additional income to report for earning on the 1099-Q box 2. It looks like there is a calculation being done and he's subject to 65% of the earnings as additional income. Is this the "Kiddy tax?" I am seeing Form 8615 being generated in his return and I had not made that connection until now.

It sounds like you're doing the first part right. Earlier you said he had more than $5050 of income. If he's getting a $2500 non refundable credit, he has a lot more than $5050 of income.

Q. Why is he getting additional income to report for earning on the 1099-Q box 2?

A. That's not unusual. See the general discussion on 529 distributions above. Diverting (re-allocating) some of the expenses from the 1099-Q to the tuition credit is one usual cause. For more specific help, provide your numbers.*

Q. Is this the "Kiddie tax?"

A. Yes or maybe partially yes. The kiddie tax is applied to any unearned income. If some of the 1099-Q is taxable, it is considered unearned income.

*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)?
Is the student an undergrad or grad student?
Is the student a degree candidate attending school half time or more?

SharonD007

Form 1099-Q only needs to be reported on the tax return of the person whose SSN is on the form if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. If the withdrawal and adjusted qualified expenses are more, the earnings on the excess distribution would be taxable income.

Since the withdrawal and the amount in box 1 of the 1098-T form is the same, the 1099-Q doesn't have to be entered on the tax return. If you are the owner and the 1099-Q has your SSN, then if the withdrawal exceeded the tuition and qualified educational expenses, it would have had to be reported on your tax return.

You indicated that you couldn't claim your son because he made more than $5,050. Was he under 24? For a full-time student who is under 24, the gross income doesn't matter. if he meets the other criteria, he would be considered a Qualifying Child Dependent.

For a Qualifying Child Dependent:

He must be related to you.
He can’t be claimed as a dependent by someone else.
He must be a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
If he's married, he can’t file a joint return with his spouse.
He must be under the age of 19 (or 24 for full-time students).
- No age limit for permanently and totally disabled children.
He must have lived with you for more than half the year (exceptions apply).
He didn't provide more than half of his own support for the year.

For additional information, review the TurboTax article Rules for Claiming a Dependent on Your Tax Return.

To find out what are qualified educational expenses, review the Guide to Tax Form 1098-T: Tuition Statement. Please review the TurboTax articles Guide to IRS Form 1099-Q: Payments from Qualified Education Programs and What is IRS Form 1099-Q? for further details.

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

Hal_Al

Employee

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 $14,600 of taxable scholarship (in 2024) and still pay no income tax.

Hal_Al

Employee

Q. My son can not be a dependent due to gross income over $5,050. Right?

A. No. It takes more than that to disqualify a college age (under 24) child from being a dependent.

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" [QR] in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

So, if he doesn't meet the rules for being a QC dependent, then yes, the more than $5050 of income would disqualify him from being a QR dependent.

wilensdavidAuthor

Thanks Hal_AI,

He is a FT student, age 22, and lived with us for the whole year in 2024. We provided over half his support so he would be eligible if we wanted to list him as a dependent.

The problem, and I have done tried this both ways, is that by him marking the box on the personal info sheet of his return that someone can and will claim him as a dependent on their tax return, his return significantly swings from a nice refund to having to pay a little tax. It's way more than the credit I will see on my return for having him listed as a dependent - and none of this answers why ANY of the box 2 earnings on the 1099-Q is taxable to him (or to us) as it was 100% used for tuition / fees at a qualified institution. The boxes 1 of both forms are exactly the same number.

Hal_Al

Employee

"By him marking the box on the personal info sheet of his return that someone can and will claim him as a dependent on their tax return, his return significantly swings from a nice refund to having to pay a little tax."

What you are seeing may be the result of an error. If someone CAN claim him (and you can) you cannot answer the "someone can question" with a no. You can answer the "someone will question" with a no.

While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A full time student, under age 24, is only eligible for the refundable portion (usually $1000) of the American Opportunity Credit (AOTC) if he/she supports himself by working. He cannot be supporting himself on student loans & grants and 529 plans and parental support. It is usually best if the parent claims that credit, if eligible.

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

wilensdavidAuthor

Thanks Sharon007,

He is 22 and a full time student that lives with us. We provide over half his support (room/board, utilities, etc). so I guess he's a Qualified Dependent for some kind of tax credit on our return.

The problem I have is that, if I include him as a dependent, and he says someone will claim him as a dependent on his return, his refund drops considerably, and we only get a $500 credit if he's on our return.

In simple terms, it's far more advantageous for him to include the 1099-Q and the 1098-T on his return and NOT have us claim him as a dependent on our return.

Now to the matter of why he has ANY income attribution for the 1099-Q earnings. The 529 money went directly to his qualified college. 100% was used for qualified tuition and fees. It's the exact same number on both box 1 of the1099-Q and box 1 of the 1098-T.