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529 1099Q has parent/account owner as recipient and box 6 checked when distribution was used for child/beneficiary

Forum|Forum|4 years ago
February 5, 2022
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My 1099-Q form shows me, the parent/529 account owner, as the recipient (because I mistakenly had the distribution deposited into my bank account, instead of directly paying my child's private elementary school). I have documentation showing I paid my child's school. Also, box 6, "If this box is checked, the recipient is not the designated beneficiary", is checked. If I try to enter the form exactly as I received it, into TurboTax the distribution becomes taxable, which is not correct.

In reading this article, it sounds like entering my 1099-Q form into TurboTax is not required. However it also sounds like since box 6 was checked, if I don't enter the form with my tax return, I may enter into an unwanted exchange with the IRS.

Here are some of the key statements from the above linked article:

"If that box is checked, the IRS computers are apt to send out deficiency notices assessing tax, interest, and penalty, even when you know with certainty that the withdrawals were tax-free based on your beneficiary’s qualifying college expenses."

"Some will advocate attaching a statement to your tax return that details your beneficiary’s college expenses and explains that the withdrawals are tax-free, but I am not convinced that will help."

I called the 529 plan administrator, just talking to the first person I could get on their general phone line and it sounded like they may not send me a corrected form, since the form is correct from their perspective, but not mine. Should I push them harder, providing them documentation of the related education expense for the child/beneficiary?

How should I proceed?

Thank you.

529 Plan

Best answer by Hal_Al

Box 6 is irrelevant. You did not make a mistake in having the money sent to you. It does not matter where the money was sent as long as the student's tuition was paid in the same year as the distribution.

A corrected form is not warranted. Don't push them. They have done it right.

Just forget about the 1099-Q. The original advice is correct.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, 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 don't need it. All you need is receipts that the tuition was paid)

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."

Box 6 being checked does not trigger the IRS computers.

Hal_AlAnswer

Employee

Box 6 is irrelevant. You did not make a mistake in having the money sent to you. It does not matter where the money was sent as long as the student's tuition was paid in the same year as the distribution.

A corrected form is not warranted. Don't push them. They have done it right.

Just forget about the 1099-Q. The original advice is correct.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, 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 don't need it. All you need is receipts that the tuition was paid)

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."

Box 6 being checked does not trigger the IRS computers.

S

svdp88a

I am having trouble with entering turbotax and am not sure I am entitled to the Lifetime Learning Credit. Here is the scenario:

My parents set up a 529 plan for me years ago and I started part-time graduate studies in Fall 2021, but also currently taking Spring 2022 courses (which were paid by the plan in Dec. 2021). I had the money go directly to the college from the plan. When the plan issued the 1099Q (to me), they issued it for $8,400, which was the total distribution for the Fall and Spring Semesters ($4,200 x 2); however, the college issued the 1098T (to me) for $4,200 (for only the Fall semester).

It is my understanding that I would not pay any taxes on this distribution. However, how do it enter it in turbotax so that I am not having to include income?

Also, would I be entitled to any Lifetime Learning Credit?

Thanks.

Hal_Al

Employee

@svdp88a The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.

You claim the tuition credit, or report scholarship income, or claim a 529 distribution as tax free, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid ($8400 in your case).

That said, you don't need to enter the 1099-Q, at all.

You can just not report the 1099-Q, at all, if the 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 would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. 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."

Q. Would I be entitled to any Lifetime Learning Credit (LLC)?

A. You can't double dip. But, you can decide to claim the LLC, instead of using all the tuition to make the 529 distribution tax free. Better yet, if you are a half time or more student, room and board (even if living off campus) are qualified expenses for a 529 distribution, as are books and computers. You may have enough other expenses, for the 1099-Q, to use all the tuition for the LLC.

_______________________________________________________________________________________

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.

B

bkpickering

My situation is similar (529 / 1099Q is in my name / SSN as the parent, with box 6 checked). Note: 1098-T from school is in student's name. Furthermore, since my dependent daughter is in her final year of college and there is extra $ still in her 529 account, we decided to withdraw additional $ that equaled her scholarship amount. I hope that this additional $ can somehow be entered on her tax form so that it is taxed at her tax rate. Since forms are in parent's name, TurboTax has me enter all numbers on my form. Any guidance on how to enter distributions and expenses so that the student pays the tax for the excess distribution amount (at her lower rate)?

Also, i believe that due to our income, we don't qualify for either educational tax credit. However, can the student quality for either by entering on their tax form?