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COLLEGE TUITION PLAN, is this not a taxable item

Forum|Forum|7 years ago
June 6, 2019
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I received at 1099Q and the income showed up on my son's income tax form as income but the funds went directly to the college why is this now a taxable income?

TurboTax Deluxe Windows

Best answer by Hal_Al

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient".
The 1099-Q gets reported on the recipient's return. The recipient's name & SSN will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the QTP. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (not yours), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
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 (usually on the student’s return)

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)

If the 1099-Q goes on the student’s return, do not enter the 1098-T on his/her return. Instead enter only the net qualifying expenses ($3000 in the example above)

Hal_AlAnswer

Employee

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient".
The 1099-Q gets reported on the recipient's return. The recipient's name & SSN will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the QTP. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (not yours), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
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 (usually on the student’s return)

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)

If the 1099-Q goes on the student’s return, do not enter the 1098-T on his/her return. Instead enter only the net qualifying expenses ($3000 in the example above)

MargaretL

Employee

Usually, 1099-Q distributions are not taxable to you if you transferred the funds to another program, another family member, or used the funds to pay for qualified education expenses. Qualified education expenses for the purposes of the 529 plan distributions includes room and board, books tuition and fees.

Please be sure that not only has the 1099-Q been entered, but that the educational expenses paid with the distributions have been entered (Deductions & Credits section, Expenses and Scholarships). There must be offsetting qualified educational expenses listed for the same taxpayer to match against the distribution.

If you are inputting qualified educational expenses, it is most likely that your input indicates 100% of those educational expenses should be used toward educational credits or deductions. If the educational expenses benefit a taxpayer with a credit or deduction, they can NOT also be used to offset 1099-Q distributions. Educational expenses can only be used for one or the other, but cannot be used twice.