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Dependent 1098-T and 1099-Q Confusion

Forum|Forum|4 years ago
February 21, 2022
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My dependent son is a full time college student and had no income in 2021. He received both a 1098-T from his school and a 1099-Q from the 529 fund administrator. Box 1 on the 1098-T is greater than box 1 on the 1099-Q.

Questions:

1. Does he need to file a tax return?

2. Can I still claim him as a dependent if he does need to file?

Best answer by FangxiaL

No, your son does not need to file a tax return since he had no income in 2021;

Yes, you still can claim him on your return as a dependent.

You need to enter his Form 1098-T on your return to see if you qualify for any of the educational tax credits (American Opportunity Credit or Lifetime Learning Credit). You don't enter your son's 1099-Q form on your return if the form shows that your son is the recipient (I assume so). Otherwise, you also need to enter the 1099-Q form on your return if you withdrew funds from the 529 plan and then used the money to pay for your son's tuition and other education expenses.

F

FangxiaLAnswer

No, your son does not need to file a tax return since he had no income in 2021;

Yes, you still can claim him on your return as a dependent.

You need to enter his Form 1098-T on your return to see if you qualify for any of the educational tax credits (American Opportunity Credit or Lifetime Learning Credit). You don't enter your son's 1099-Q form on your return if the form shows that your son is the recipient (I assume so). Otherwise, you also need to enter the 1099-Q form on your return if you withdrew funds from the 529 plan and then used the money to pay for your son's tuition and other education expenses.

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P

PatCypAuthor

Thanks, I appreciate the quick response!

I did enter the 1098-T on my return and the 1099-Q came in my sons name. The funds from the 529 were paid directly to his school and did not go to me first.

Hal_Al

Employee

Emphasizing what Fangxial said, you should enter the 1098-T, on your tax return to claim the education credit* on your student-dependent's tuition.

But, doesn't he need to claim the tuition to keep the 1099-Q from being taxable. Not exactly. You will only need to use $4000 of the tuition to claim the the American Opportunity Credit. The rest of the tuition can be applied to the 1099-Q. Room and board* (even if living off campus) and books and computers are also qualified expenses for a 1099-Q. So there are plenty of expenses to offset the 1099-Q. So, he still will not need to file a tax return and the 1099-Q does not have to be reported at all.

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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!

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."

*Student must be half time or more

B

Bob-K3

I carefully read this discussion and I think I understand the bottom line. That is, "Nontaxable distributions are not required to be reported...". However, I don't understand the major difference in the Box 1 amounts between the 2 forms, which is about $2,000. (1098T is greater than 1099-q) . All of the funds have been used to pay for tuition and fees. since the 1098-T amount is greater than the 1099-Q amount, can I just ignore the 1099-Q, even if I am the recipient?

Also, I tried several times to enter my 1098-T info and could not, possibly because we have already obtained 4 years of the American Opportunity credits?

Thanks for your help.

Hal_Al

Employee

Q. I don't understand the major difference in the Box 1 amounts between the 2 forms, which is about $2,000.

A. You told the 529 plan how much to distribute (take out). It's up to you to make the two box 1 numbers match, if that's what you want. But you don't want that because room and board (even living off campus), books and computers are also qualified expenses for a 529 distribution and those amounts are not included in box 1 of the 1098-T.

Q. Can I just ignore the 1099-Q, even if I am the recipient?

A. Yes. "Nontaxable distributions are not required to be reported...".

If you are not eligible for the American Opportunity Credit, you may be eligible for the Lifetime Learning Credit (LLC), which is a straight 20% of tuition (up to $10K), but is non-refundable (can only be used to offset income tax).

_______________________________________________________________________________________

Qualified Tuition Plans (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

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 $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income

**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. Most people come out better having the scholarship taxable before the 529 earnings.