529 Distribution Offset By Scholarship, Parent 1099-Q

Forum|Forum|3 years ago
February 14, 2023
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We took a 529 distribution based on the "scholarship exception." (The exception that say you can withdraw up to the amount of a tax-free scholarship and use the money for any purpose penalty-free.) The distribution showed up on the parent's 1099-Q, despite the fact that the 529 plan mailed the check to the student and in the student's name!

I'm going to call the plan and whine, but I don't expect them to re-issue the 1099-Q.

Is there a way to offset that distribution on the parent's return by the amount of the scholarship?

Best answer by Hal_Al

@DavidD66 said "If the student is not your dependent, then the student should report the gain. It doesn't matter if the distribution (1099-Q) sent to/in the name of the parent(s)".

I disagree with that. The 1099-Q is reported on the "recipient's" return. The recipient is the name and SS# on the 1099-Q.

Q. Is there a way to offset that distribution on the parent's return by the amount of the scholarship?

A. Yes, the TT interview theoretically handles this situation, but it's messy and easy to make mistakes. Here's a workaround:

Enter the 1099-Q. When asked who the student is, answer: someone else not listed here, whether he is you dependent or not (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Also enter the amount of the scholarship in the box "Tax-free assistance". This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.

DavidD66

The exception for scholarship recipients who also have 529 plans allows funds to be removed from529 plans without penalty up to the amount of the tax-free scholarship. You still have to report the gain on the distribution. If the distribution doesn't exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. If the student is your dependent, any gain should be reported on your tax return. If the student is not your dependent, then the student should report the gain. It doesn't matter if the distribution (1099-Q) sent to/in the name of the parent(s).

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Hal_AlAnswer

Employee

@DavidD66 said "If the student is not your dependent, then the student should report the gain. It doesn't matter if the distribution (1099-Q) sent to/in the name of the parent(s)".

I disagree with that. The 1099-Q is reported on the "recipient's" return. The recipient is the name and SS# on the 1099-Q.

Q. Is there a way to offset that distribution on the parent's return by the amount of the scholarship?

A. Yes, the TT interview theoretically handles this situation, but it's messy and easy to make mistakes. Here's a workaround: