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529 taxable distribution due to scholarship and how to enter into Turbo Tax

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April 17, 2020
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Hoping someone can help with this - I have tried so many different ways.

Daughter is sophomore in college. We use 529 to pay for tuition, fees, room & board. We also get American Opportunity credit (last year) and want to again this year (for expenses outside of tuition, fees, room & board - so for books, supplies, and computer expenses). Daughter gets a full tuition scholarship from the university, so 1098-T shows tuition, fees, room & board, plus the amount of her scholarship (so in essence we used 529 funds to pay for all of that minus tuition since scholarship paid for tuition).

So, very intentionally we took out an 'extra' amount from 529 this year, close to the amount of one semester of scholarship, so she could buy a car (we also pitched in, not that it matters but fyi).

I tried TT online first; now I've paid for the download version so I can access the forms directly but I'm hoping to not have to override TT to edit the forms myself b/c then I can't file electronically.

Problem is, every time I let TT walk me through, it tells me our 529 plan distribution exceeded the amount of QEE, which it did, so it's not letting me have AOTC. But nowhere will TT let me tell it that a portion of the distribution is taxable (without 10% penalty due to scholarship) so that we can still get AOTC. I read one similar help post that said to be sure to enter the 1099-Q first - well I tried and it won't let me. It keeps saying I don't have to enter 1099-Q at all but if I want to, it is making me enter the education expenses first and the 1098-T which then means it won't give me AOTC.

When I look at the tax forms, it appears we need to report the taxable amount of the distribution as income on Schedule 1, line 8 - but I've gone into the income section time and time again and see no way to do this. Is my only option to override TT and edit the form(s) myself? Does anyone know a way to do this in TT so that I can report a portion of the 529 distribution as taxable due to scholarship, and then use the adjusted 529 tax-free amount to show as covering QEE whereby I will have QEE leftover that will go towards AOTC?

Thanks!!

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Best answer by Hal_Al

The 1098-T does not usually include room and board. It's had to believe a college would make that mistake.

Do not try to enter the taxable portion of the 529 distribution in the income section. It's all done in the education (deductions/ credits) section.

The car is not a qualified expense, do not enter the purchase.

I'll assume the 1099-Q is in your name & SS# (you are the "recipient"), not your daughter.

Enter the 1099-Q first. Enter the 1098-T, then follow the interview to enter books and room and board. 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 the amount (usually $4000) you want to use or change it.

Or provide the following info and I'll tell you exactly how to do it.

Box 1 of the 1098-T

Box 5 of the 1098-T

Box 1 of the 1099-Q

Box 2 of the 1099-Q

How much you/she paid for room & board

How much you/she paid for books, computers and other course materials and tuition/fees not shown on the 1098-T.

How much reportable income does you daughter have and does sh plan to file a return

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

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

***An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Scholarship will (most likely) be taxed at a lower rate on her return than the 529 will be taxed on your return

Hal_AlAnswer

Employee

The 1098-T does not usually include room and board. It's had to believe a college would make that mistake.

Do not try to enter the taxable portion of the 529 distribution in the income section. It's all done in the education (deductions/ credits) section.

The car is not a qualified expense, do not enter the purchase.

I'll assume the 1099-Q is in your name & SS# (you are the "recipient"), not your daughter.

Enter the 1099-Q first. Enter the 1098-T, then follow the interview to enter books and room and board. 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 the amount (usually $4000) you want to use or change it.

Or provide the following info and I'll tell you exactly how to do it.

Box 1 of the 1098-T

Box 5 of the 1098-T

Box 1 of the 1099-Q

Box 2 of the 1099-Q

How much you/she paid for room & board

How much you/she paid for books, computers and other course materials and tuition/fees not shown on the 1098-T.

How much reportable income does you daughter have and does sh plan to file a return

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

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

***An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Scholarship will (most likely) be taxed at a lower rate on her return than the 529 will be taxed on your return