1099Q distribution for my independent beneficiary that was used to pay her tuition but I am getting taxed on it

Forum|Forum|3 years ago
February 16, 2023
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I have an independent adult child, that worked for several years but went back to graduate school. She has been independent from my taxes for a couple years and had a full time job. She decided to go back to graduate school. I had some money left in a 529 in her name where I am the owner of the account and she was the beneficiary. I took the distribution from the account and was sent the check. I cashed this check and used all of this money to pay her graduate school tuition and I have the receipts from the school to show this. However, the 1098-T went to my daughter as she is the student. Now I am getting taxed on this 529 distribution when it all went to be used for tuition and should not be taxable. How do I show the IRS on my taxes that this distribution went to a legitimately exempt tuition payment for my accounts beneficiary?

KrisD15

It would have been a good idea to have the student make the distribution so that the 1099-Q was issued in the name of the student.

Regardless, at this point, if you are applying the independent student's expenses against the distribution, you only need to let the student know, so that the student subtracts that amount from any expense she might claim on her return.

There is no real way to illustrate to the IRS on either return how you are handling the 1099-Q.

All you can do is keep records and receipts with both tax files in case the IRS makes an inquiry.

You needn't enter the 1099-Q into the TurboTax program (IF IT WAS USED FOR EDUATION PURPOSES)

Or, you can enter the 1099-Q and answer that it was used for education expenses and that the education expenses were for someone not listed on your return.

At that point the program will tell you that you do not need to report the 1099-Q.

There are other options to how you and the student can apply distributions, scholarships, and expenses. For example a 1099-Q can go towards Room and Board in certain situations freeing up expenses that might be applied to a credit.

IRS Pub 970 illustrates examples if you and your daughter want to consider rearranging allocations which might result in a better outcome for you both.

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Hal_Al

Employee

If TurboTax (TT) is saying it's taxable, you've made a mistake in entering info. It's best to just delete the 1099-Q.

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. You, and the beneficiary, would still have to do the math to see if there were enough expenses left over for her to claim the tuition credit. The two of you cannot double dip!

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."

That said, and you still want to enter it, it's actually easier, in TT, when the beneficiary is not your dependent. Instead of entering the educational expenses in the education expenses section, you enter it in the 1099-Q section of TT. When asked who is the student, check "someone not listed here". On the next screen, enter the student's name. This will eventually give you one simple screen to enter all expenses. That will get you the TT worksheet, for your file. Nothing about the 1099-Q goes on the actual tax forms, when none of the 1099-Q is taxable.

You should coordinate with your daughter on allocating the expenses. It may actually be better for you to pay some tax, on some of the earnings, so that she can maximize the education credit, on her tax return. The Lifetime Learning Credit (LLC) is worth 20% of tuition paid. Compare that to your tax bracket rate. Grad students are not eligible for the more generous American Opportunity Credit (AOC or AOTC).

BDL3

I still run into a problem with TT after entering 1099Q. TT still wants information from the 1098T, and indicating that if no one is on the list is the dependent student that I cannot claim the education credit. I do know that my independent son is taking the education credit on his own tax return, but TT seems to be stuck on this. Should I just ignore this part of the software?