1099-Q and Post 9/11 GI Bill

Forum|Forum|4 years ago
February 12, 2022
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If I pulled out 10k from a Coverdall ESA that was set up for college when I was a kid do I have to report it on my taxes if I did not use the money toward school. But I joined the Army and used the GI bill to pay for school so I did not need to use the money.

KrisD15

You will pay regular income tax on the distribution (Earnings portion) but you will not pay the 10% penalty tax.

The income you must report should be reported as "Other Income" on line 8 of your 1040.

According to the IRS:

"Exceptions. The 10% additional tax doesn't apply to the following distributions.

1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

3. Included in income because the designated beneficiary received:

a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

b. Veterans' educational assistance (see Veterans' Benefits in chapter 1);

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Hal_Al

Employee

Confirming KrisD15's answer, the earnings (box 2 of the 1099-Q) from the ESA distribution will be taxable, but you will not be subject to the 10% non qualified distribution penalty.

You want TurboTax (TT) to generate form 5329 to claim the penalty exception. The TT interview can handle this, but it can get complicated. Enter the 1099-Q before you enter the 1098-T. I assume the GI bill covered all expenses, including room and board. If you had any qualified expenses not covered by VA/GI benefits, the taxable portion of the ESA distribution can be reduced.

You may want to use this short cut: when you enter the 1098-T, enter the amount from box 1 of the 1099-Q ($10K) in both box 1 and box 5 of the 1098-T. Then you don't need to enter any other numbers. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. What you enter is not sent to the IRS. Using the short cut assumes total educational expenses (including room & board) equal or exceed the distribution and VA benefits equal or exceed the expenses.