1099Q and 1098T situations

Question

Hi. We have a 529 plan for our kids. I am the owner. In August, I withdrew for the first time to pay my son's fall 2020 tuition. Tuition was about $5900 (with room/board and fees it was nearly 10000), but we withdrew $2400 from the 529. I had the withdrawal deposited into our checking account and then submitted an echeck to the school for the full tuition amount.

The 1099 Q was sent to me as the owner. I have the statements from the school showing that his tuition was $5900 and bank statements showing the say the money left my bank account to pay the school. How do I report it so that I am not taxed on earnings?

The 1098T was issued to my son, in his name. Of course, it does not list the payment from the 529 because they received a lump sum payment from me via echeck. Should I let my son enter 1098T on his tax return or should it go on ours since we still claim him as a dependent? I have heard people talk about allowing their child to enter it in their tax return to help them qualify for a stimulus payment. We don't qualify for a stimulus, but on his own, he would. But I am not sure if that even matters or is even doable.

Please advise.

Thanks.

LenaH · Accepted Answer

Yes, enter the tuition and 529 distribution on your return since he is your dependent. You will not be taxed on the earnings for your 529 plan if is a qualified distribution. From the information given, it seems to be qualified and none of the earnings on the distribution would be taxed. Entering education expenses and a distribution from a 529 plan is a two step process.

First, you must enter the 1098-T. To do so, please follow these instructions:

Open your return in TurboTax.
Search for 1098-T with the magnifying glass tool at the top of the page.
Click the Jump to 1098-T link at the top of the search results.
Enter the information as shown on the 1098-T.
Scroll down on the screen Did you Pay for Books or Materials to attend school? and you should see a question about whether you took a 529 distribution.
Follow the on-screen instructions to finish entering the1098-T.

Second, enter the information regarding your 529 distribution. To do so, please follow these instructions:

Search for 1099-Q with the magnifying glass tool on the top of the page.
Select the Jump to 1099-Q link at the top of the search results.
Choose you as the recipient and click continue.
Choose the student's name and click continue.
Follow the on-screen instructions and enter data as shown on your 1099-Q.

After completing the steps above, the earnings on the 529 distribution will not be taxable.

Hal_Al · Answer

I find it goes better if you enter the 1099-Q (529 distribution) first, Then enter the 1098-T (educational expenses). For example TurboTax will not give you the room & board entry boxes if you enter the 1098-T first.

Room and board are qualified expenses for a 529 withdrawal, but not for the education credit. If you first apply the 529 distribution (withdrawal ) to room and board, that frees up more of the tuition to be claimed for the tuition credit. This happens automatically in TurboTax, as long as you enter your room and board expenses. The income limit for claiming the American opportunity Credit is $180,000 (married filing jointly).

You enter the 1099-Q on your return because you are the "recipient". You enter the 1098-T on your return because the student is your dependent.

529 distributions are never shown on the 1098-T, even when the money goes directly the school.

Q. "I have heard people talk about allowing their child to enter it in their tax return to help them qualify for a stimulus payment. Is that doable?

A. No. If the student qualifies as your dependent, whether you actually claim him or not, he does not qualify for a stimulus payment.

Once the distribution is sent to you (and the 1099-Q issued in your name) he cannot report the distribution on his return. When you make the distribution, you can elect to have it sent to him and any taxable part is his income (you have no taxable part this year). But, even though it's his income it still counts as support from you since you are the owner. He cannot claim to be self supporting for the dependency support test.

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More on 529 plan distributions

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 $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

**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.