529 withdraw for scholarship earned not calculating tax correctly

Forum|Forum|4 years ago
February 17, 2022
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I have 2 daughters with identical situations (different numbers obviously) and turbo tax is treating them differently. We made a withdraw from each of their 529s in the amount of their scholarship for the year. Technically, they should both be taxed on the earnings of those withdraws. However, one is taxed and one is not. I went back and checked all the interview questions and i answered equivalently (again different numbers) for both of them. To simplify, we DO need to pay taxes on them because another relative actually pays their college tuition and because of the there is no other expenses to claim besides what is in box 1 of each of their 1098-Ts and those numbers are both larger than box 5 of their 1098-Ts (scholarship). The withdraws were for the exact amount of the scholarships. We also do not qualify for any of the other education credits. Also both 1099-Q have me as the recipient so need to go on my return. Although the calculations are in my favor, I am trying to be honest and not have an issue later.

Hal_Al

Employee

The TurboTax (TT) interview is tricky and mistakes can be made.

One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q.

@kbr25 said "we DO need to pay taxes on them because another relative actually pays their college tuition"

That's irrelevant. Although the general rule, in taxes, is that you must be the one making the payment, to get the deduction, there is an exception for education. You may count all expenses, for the 529 distribution, even if paid by someone else.

@kbr25 said "because of the there is no other expenses to claim besides what is in box 1"

That's unlikely. Room and board are qualifying expenses for a 529 distribution, even if the student lives off campus. Board (food) is a qualifying expense even if the student lives at home. Books, and even a computer (usually not shown in box 1 of the 1098-T) are qualifying expenses.

Having the student declare some of her scholarship taxable, on her return, can free up more expenses for you to use against the 1099-Q (assuming the scholarship money is not restricted to being used for tuition).

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 1098-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. If the student lives at home, only the school's board charge for on campus students.
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?

kbr25Author

Thank you for trying to help. My biggest concern is that turbo tax is calculating the same situation (different numbers of course) differently for each of my 2 daughters. Also, we took the distribution from the 529 as "non-qualified" so i feel that I need to treat it appropriately (paying the taxes) on our taxes so there is no trouble later.

in answer to your questions:

-i am the parent

-the students are both dependents

info for first daughter: this one turbo tax did not calculate that we owed taxes on

-box 1 1098t is 94292

-box 5 1098t is 15000

-no other scholarships

-box 5 does not include 529/esa plan payments

-i dont believe scholarship is considered restricted although it goes directly to tuition (take off bill, we do not receive it, it is from the university)

-box 1 1099Q 15000

-box 2 1099Q 10365.56

-parent is the recipient

-not claiming tuition credit

-student is undergrad

info for 2nd daughter-this one is saying we owe taxes on the earnings, which is correct

-box 1 1098t is 33600

-box 5 1098t is 20062

-no other scholarships

-box 5 does not include 529/esa plan payments

-i dont believe scholarship is considered restricted although it goes directly to tuition (take off bill, we do not receive it, it is from the university)

-box 1 1099Q 20062

-box 2 1099Q 13675.50

-parent is the recipient

-not claiming tuition credit

-student is grad student

thank you for any help you can provide. My goal here is to have turbo tax correctly calculate both in the same way since situationally they are the same.