529 distribution penalty

Forum|Forum|5 years ago
March 6, 2021
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My son only went to Vo-tech 2nd half of 2020 (classified as independent) he received a 1098-T because he received a full scholarship. I can no longer claim him as a dependent. I took a $15K distribution from a 529 that I own where he is the beneficiary. I put in the 1099-Q but when I completed my return there is a 10%penalty tax. I agree this is treated as income but is an allowable distribution. When I amend my return how do i fix this (form 5329 part II line 6 is empty)?

Hal_Al

Employee

When you enter the 1099-Q in TurboTax, select "somebody else not listed here" when asked who the student is. Follow the interview. It will give you boxes to enter education expenses in the 1099-Q interview (not separately in the education section, as is done for dependents). Enter the amount of tuition that his school charged. Then enter the same amount at adjustments/tax-free assistance (his scholarship). Those two entries tell TurboTax that the student had qualifying expenses that were paid by scholarship and that qualifies you (the owner and recipient) for the penalty exception. You should also enter his room and board expenses (even if they were paid by scholarship). Scholarships that pay for R&B are taxable to the student. That means they were paid with "his money", not tax free scholarship and are therefore qualifying expenses for the 529 distribution. So, this should not only eliminate the penalty, it may even reduce the amount of tax.

No, since you are the recipient, you don't report it on your daughter's return. Go back the beginning of the 1099-Q interview. W