Solved

529 plan qualified distribution counting as income problem

Forum|Forum|5 years ago
February 2, 2021
2 replies
0 views

I'm the recipient of a $28,817 distribution from a state 529 Plan in 2020 benefitting my child, who is in graduate school (post-college). This entire amount was for qualified expenses. I received a 1098-T with $46,253 in scholarships, which the school kept and applied toward reduced tuition. Tuition payments to the school, including this $46,253 scholarship credit, were $59,895, so our out-of-pocket cost for tuition were around $16,000. My child also has $12,400 in room and board costs and $1100 for books. Total qualified expenses were thus $29,500, which exceeds the $28,817 529-plan distribution on the 1099-Q.

For reasons I don't understand, Turbotax's form, the 1099-Q worksheet, lists only $22,400 of the $28,817 distribution as qualified expenses, with $6,417 listed as "excess distributions" and lists $1,008 as taxable to me. I don't think that there were any "excess distributions" or that any of the distribution should be taxable, as it all went for qualified expenses. (My child had no work income related to the school.)

Help with entering the data so as to get the correct result on my forms would be very much appreciated.

Best answer by Hal_Al

Yes, grad school is college and is (usually) pursuing a degree.

Simple answer to your other concerns is delete everything related to education, the 1098-T and 1099-Q. You have determined that none of the 1099-Q is taxable nor is any of the scholarship reportable and taxable. You are not required to enter either document.

That said, let's open another issue. You stated " I don't think we got, or qualified for, this credit. There is another tuition credit, in addition to the one limited to 4 years (AOC-American Opportunity Credit). It's the Lifetime Learning Credit (LLC) and is available to Grad students. Your child doesn't have enough income to claim it, on his own return. But, if he qualifies as your dependent, there is loop hole available for you to claim it. It's worth 20% of the tuition paid, up to $10, 000. It's non refundable, so you must have some tax liability. Your child would have to report some scholarship as taxable. But, if he has no other reportable income, the tax is 0, after the standard deduction.

To qualify as your dependent, he, most likely, would have to have been under 24 on 12-31-20.

KrisD15

The program is taking 4,000 expenses for the education credit since that is more valuable than the amount of tax you pay on that portion of taxable distribution.

At the conclusion of the Education Interview in TurboTax, it should have stated the credit which it advised you take. You can change that if you want.

Type letme into the search box

Click the "jump to letme" link that appears.

The program will direct you to a screen where you can see which credit(s) you are eligible for and allows you to make a selection.

The IRS allows you leeway and options for how education expenses, distributions, and scholarships can be reported so that the Taxpayer may get the better tax break.

Please look at IRS Pub for more information.

IRS Pub 970

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

D

DL401Author

KrisD15--thank you for responding, but I don't think we got, or qualified for, this credit. My student already has completed 4 years of college and we got the credit each of those 4 years. (https://www.irs.gov/newsroom/american-opportunity-tax-credit-questions-and-answers Question #12.)

Hal_Al

Employee

KrisD15 may be right. This has been a glitch in TT, in the past (I haven't checked it this year). It tries to give you a credit when you don't qualify.

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit” verify that it is 0. If there is an amount there, change it to 0.

If that happened, it would also show on the worksheets.

Hal_Al

Employee

$59,895 – 46253 = 13,642 (not 16,000).

13,642 + 12,400 + 1100 = 27,142 Qualified expenses for the 1099-Q (not $29,500)

28,817 -27,142 = $1675 Non-qualified distribution

1675 / 28,817 x the amount in box 2 of the 1099-Q = your taxable income

For why TT came up with $22,400 instead of 27,142, you need to check your entries and the 1099-Q worksheet and the student info worksheet.

D

DL401Author

Hal_Al, Thank you for your response. You are of course correct about my arithmetic error--thanks. (I noticed it right after I sent the question). I've adjusted the figures, so that the qualified expenses equal the 529 distribution, but I'm still seeing some anomalies that perhaps you can advise me on:

1) I don't understand why TT gives me a message saying that my child's education assistance counts as income and that my child needs to file a tax return and that the $46,253 is taxable. I believe this is not the case, since all the distribution was used for room/board, tuition, and books only.

2) when I followed your suggestion and looked for the student info worksheet, I see that there is no category for post-graduate/professional school. Should I check the box (2C) for "college," even though they graduated from college some years ago? Checking the "college" box seems to solve my "excess distribution" problem and reduce my "earnings taxable to recipient" to zero. However, on the worksheet, there is a black "x" for Part 2 (Student Information) for both questions 3 and 4 in the "No" column. The correct answers in this case are actually both "Yes"--they are in a degree program and they are doing a post-secondary degree to improve job skills-- but I don't seem able to change this No to a Yes on the form.

Appreciate your advice on this and would ask TT to consider adding a "Graduate School" category or more clearly differentiating between "College" and post-graduate degree programs, or else noting that "college" includes post-college programs, if that's how it works.

Hal_AlAnswer

Employee

Yes, grad school is college and is (usually) pursuing a degree.

Simple answer to your other concerns is delete everything related to education, the 1098-T and 1099-Q. You have determined that none of the 1099-Q is taxable nor is any of the scholarship reportable and taxable. You are not required to enter either document.

That said, let's open another issue. You stated " I don't think we got, or qualified for, this credit. There is another tuition credit, in addition to the one limited to 4 years (AOC-American Opportunity Credit). It's the Lifetime Learning Credit (LLC) and is available to Grad students. Your child doesn't have enough income to claim it, on his own return. But, if he qualifies as your dependent, there is loop hole available for you to claim it. It's worth 20% of the tuition paid, up to $10, 000. It's non refundable, so you must have some tax liability. Your child would have to report some scholarship as taxable. But, if he has no other reportable income, the tax is 0, after the standard deduction.

To qualify as your dependent, he, most likely, would have to have been under 24 on 12-31-20.