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Question

529 distribution being taxed

Forum|Forum|3 years ago
February 14, 2023
4 replies
0 views

TT is taxing the 529 distribution. The distribution is less than the costs for my dependent's eligible college expenses. (1098T amounts entered). There are no scholarships, refunds, student loan payments. What steps are required so TT will stop entering the 529 distribution as taxable income. This is not the 1st year TT has created this issue for me. Clear instructions and steps for entering the 529 distribution as not taxable since 100% of the distribution was used for qualified, eligible college expenses is requested.

SharonD007

Since the cost of your dependent’s qualifying educational expenses exceeded your 529 Plan distribution, you are not required to report it on your tax return. Just keep the document with your tax records. You only need to report the 1099-Q if your 529 Plan distribution exceeds your dependent’s qualifying educational expenses. You will report the earnings on the excess distribution as Other Income on your tax return. Make sure that you enter the 1099-Q on the tax return of the person whose SSN is on the form.

Please review the TurboTax articles What is IRS Form 1099-Q? and Guide to IRS Form 1099-Q: Payments from Qualified Education Programs for further details.

Here are the instructions to enter your 1099-Q into TurboTax. If you are using TurboTax Online:

Launch TurboTax
In the search box type: 1099-Q and select the Jump to link
Follow the screens to enter your information.

If you are using TurboTax CD/Download:

Launch TurboTax
Select Federal Taxes and then select Deductions & Credits
Select I'll choose what I work on
Scroll down to Education, select Start or Update next to ESA and 529 qualified tuition programs (Form 1099-Q)
Follow the screens to enter your information.

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

Rhys

I had this problem also. For me it was because the Student Info Worksheet was still using $10k toward the tax credit, despite the fact that I'm not eligible for the credit due to high income. Because I didn't get the credit, but the worksheet was still using $10k in expenses toward the credit, it reduced my expenses that were funded by the 529 withdrawal, making part of the withdrawal excess and taxable. The answer is not to tell people not to enter 1099Q info; the answer is for Intuit to get their act together and fix the problem. The Easy Step process asks people to enter the information, so people will enter the info. Some people I believe will pay thousands extra because of this issue. FIX IT.

Ed328

Oh man, fully agree. It’s a TurboTax issue. I too have exceeded the income limit and I believe I’m getting taxed on the $10k that I’m not eligible for! I noticed that my tax burden increased by about $2000 which makes perfect sense when considering the $10k. I am entering my data into HR Blocks software, and so far I haven’t been asked to enter the 1099Q, only the 1098-T. To confuse matters even more, the university told me that they do not include Room and Board in 1098-T’s which makes it look even more like ones qualifies distributions are more than qualified expenses. Room and Board is definitely allowable as 529 expense for college tuition.

Hal_Al

Employee

Q. What steps are required so TT will stop entering the 529 distribution as taxable income?

A. One simple step. Do not enter the 1099-Q. If you have already entered it, delete it.

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 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."

______________________________________________________________________________________

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.

Ed328

I have the same issue. TT's handling of 1099-Q's and 1098-T's is very confusing. All of my expenses were for my kids college and paid for with my 529 accounts, and yet TT is calculating a significant additional tax when I enter the Q's and T's.

Hal_Al

Employee

@Ed328 If All of your expenses were for your kids college and paid for with your 529 accounts, just don't enter the 1099-Q and 1098-T. The 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

However, if you want to claim a tuition credit (and most parents do), you'll need to make some adjustments. As described above, TT will use some of the tuition to claim a tuition credit, making part of the 1099-Q taxable. You can review the student info worksheet to see how TT allocated the expenses. You should have entered the 1099-Q first, then the 1098-T, then books and room and board.

Yo may have to delete the 1099-Q and 1098-T and start over.

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 charge.
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?

Ed328

I thinks it's time for me to part ways with Turbo Tax. This Education section of your software does NOT work and I believe it caused me to pay more in taxes last year as well! The Review feature didn't catch it. FIX YOUR SOFTWARE.

RJG63

Turbo tax asks if you have received a 1099-Q even though the back of the form says "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return." If tuition and other qualified expenses exceed the overall distributions, turbotax should NOT ask the user if your received a 1099Q. Or turbotax should set up a worksheet to calculate the distribution vs the qualified expenses. The system is not working properly as is. Please revisit it, Intuit.