529 Withdrawal = Expenses, but still taxes

Forum|Forum|2 years ago
April 14, 2023
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I took a $21,000 withdrawal from a 529 + my child received $2,000 in scholarships. I entered $23,000 in qualified expenses, but TurboTax still increased the tax amount by over $900. Shouldn't this zero out? I actually had a similar issue last year, but by deleting & re-entering multiple times, somehow TurboTax eventually registered it as zero'ed out.

529 Plan

RCH86Author

Believe I have my answer from a wonderfully informative post -

Why is my child's college scholarship taxable if the tuition paid(tuition only, not room and board) is higher than the scholarship?

Answer - per IRS Publication 970, if withdrawal = expenses, then it is tax free & 1098Q & 1098T do not need to even be entered in TurboTax.

From 970:

Tax-Free Distributions

Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.

Hal_Al

Employee

Yes, generally that is the simple solution: don't enter the 1099-Q if you know none of it is taxable.

But, you may be able to claim a generous tax credit (up to $2500) by paying a little tax on the distribution and/ or having the student pay a little tax on their scholarship.

Parents are generally eligible for the credit if their income is less than $90K ($180K married filing jointly).

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 1099-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 on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
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?
Is the student a degree candidate attending school half time or more?