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Confused why TurboTax thinks there is taxable income from 1099-Q

Forum|Forum|4 years ago
February 7, 2022
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I am a bit confused about the way that TurboTax is handling our qualified education expenses when trying to apply them against 529 distributions reported on 1099-Qs.

Here is my situation:

My dependent, 21-year-old son is attending college.
In calendar 2021:
- $28,356 was billed by the school for tuition and fees.
- $4,350 of this was covered by scholarships and grants. This amount was reported on the 1098-T received from the school.
- $24,008 was paid by the parents to the school for the remaining tuitions and fees. This amount was also reported on the 1098-T received from the school. [Note that this does net to a $2 over-payment.]
- $23,900 in gross distributions were made from two separate 529 accounts to cover these payments made by the parents. $2,599 was reported on a 1099-Q under the father’s social security number (SSN) while the other $21,302 was reported on a 1099-Q under the student’s SSN. [Note that the total of the payments made exceeded the amounts drawn from the 529 plans by $108.]

This fact set means that the $23,900 total distributed from 529 plans and reported on 1099-Qs is about $108 less than the tuition and fees billed by the school that were not covered by scholarships and grants. And please note that none of the amounts above include any of the additional costs for books or room & board that the parents also paid in 2021.

I entered the 1098-T received from the school on the tax return that I am preparing for us (the parents) in TurboTax. I also entered both the 1099-Qs on our return and I did properly identify the one that was issued under our son’s SSN as being issued that way. After making these entries in TurboTax, it said that I was not eligible for any tax credits but that that the student would have to report $1,155 of taxable income from his distribution on his own return.

Why would he have any taxable income? The qualified educational expenses not covered by the scholarships/grants exceeded the total of the gross distributions made from the 529s and reported on the 1099-Qs. So, why would any of that be taxable? And, since qualified educational expenses can include books (and I think even some room and board expenses), where can those expenses be entered into TurboTax in order to have them added to the qualified education expenses total?

My son will also be doing his own tax return for his W-2 wages from a job using TurboTax. Could he just safely not report the 1099-Q under his SSN on his return? Or is that not recommended since the 1099-Q is sent to the IRS? Or can he somehow manually enter additional qualified educational expenses to cover that $1,155? [As a side note, I cannot figure out what the math might be for the $1,155 taxable amount calculated by TurboTax.]

Best answer by Hal_Al

Q. Could he just safely not report the 1099-Q under his SSN on his return?

A. Yes, that is exactly what he should do. You also should not report the 1099-Q on your return either**. The TurboTax interview and your situation are just too complicated (it does work when everything is done just right). Don't enter the 1098-T, on either return either.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. Receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You don't have either. Books cover the minor difference in $amounts. Room and board also qualify for a 529 distribution.

Yes, the 1098-T can be entered on both returns, with adjustments, when needed. But don't do that in your case.

** Note that JillS56's long write up also states **Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution.

S

stein067Author

I have been thinking about this a little more. Although I still have not figured out why TurboTax was indicating that my son might have taxable income from the 1099-Q issued under his SSN, I was thinking about a possible workaround to get the desired result of neither my son nor I having any taxable income from these 529 distributions. Since I did not qualify for any educational tax credits, could I have my son put the 1098-T on his return to cover the 1099-Q under his SSN? Is that allowed since he is my dependent? Would that mean that the 1099-Q issued under my SSN would then count at taxable income on my return? Can the 1098 be “split somehow” then to cover both 1099-Qs? Or can qualified education expenses be added manually?

J

JillS56

The 1099-Q was issued to your son, he must report the 1099-Q on his return. Since you are claiming your son as a dependent, only you can take the education credit. The 1098-T must be reported on your return. To accomplish what you are asking read through the information below and there is an example of how you might be able to give your son enough credit so that he does not have to report income on the 1099-Q or at least some of it.

More than you want to know about Qualified Tuition Plans (QTP 529 Plans) distributions

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.

The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# 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 529 plan. 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 529 plan 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 (subject to the “kiddie tax”), 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)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

S

stein067Author

Thank you for the reply. Since I appear to not be eligible for an education credit and since we also have more than enough total qualified education expenses to cover both of the 1099-Qs issued, could we just leave off the 1098-T from my return and the 1099-Qs off both my return and my son's?

Hal_AlAnswer

Employee

Q. Could he just safely not report the 1099-Q under his SSN on his return?

A. Yes, that is exactly what he should do. You also should not report the 1099-Q on your return either**. The TurboTax interview and your situation are just too complicated (it does work when everything is done just right). Don't enter the 1098-T, on either return either.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. Receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You don't have either. Books cover the minor difference in $amounts. Room and board also qualify for a 529 distribution.

Yes, the 1098-T can be entered on both returns, with adjustments, when needed. But don't do that in your case.

** Note that JillS56's long write up also states **Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution.

S

stein067Author

A bit confusing to get contradictory advice from two different “experts” with one saying “you will have to include 1099-Q and 1098-T in your tax return” and the other saying that they can safely be left out. I have reviewed the “Instructions for Recipient” info on both of the 1099-Qs and they both do say that they are not required to be filed with the return and that the recipient is responsible for determining their taxability. Based on that, I am going to go with the advise from Hal_Al to just leave the 1099-Qs and the 1098-T off of both returns. Thanks.

K

kyang1111

Dear TurboTax, please fix this problem. It seems I am not the only one seeing a portion of 1099Q being reported as income even though payment reported on 1098-T is enough to cover the distribution of 1099Q.

P

PSUNOVA

Saw this thread and I'm not certain the original problem was addressed. I ran into the same issue and after a lot of troubleshooting (and help from TT customer service) found out that the 1099-Q must be fully entered before the 1098-T. There's no logical reason why, but fixing the order of entry worked for me.

Here are two threads on the issue:

Why 1099-Q form increased my tax?

Tip when entering 1098-T with a corresponding 1099-Q