Education 1099-Q Earnings

Forum|Forum|4 years ago
March 13, 2022
1 reply
0 views

Dear TurboTax,

I do my spouse and I taxes, I have college student and my taxes say the student beneficiary must report 2054 of taxable income form this distribution. 1099-Q My child doesn't have a job or W2 so does she have to file taxes if I am claiming her as my dependent? How should I proceed?

Thank you

Angelo

Not A Product Question

Best answer by Hal_Al

If you don't make over a certain amount then taxes don't have to be submitted correct?

My numbers in the 1099-Q

Box 1 $5049

Box 2 $2053.76

2053/5049=40% non taxable 60% taxable

2053x.6= $1232 taxable

I am the owner (parent) and beneficiary Student dependent, Money directly sent to College but Student is named Recipient.

I am hoping to avoid extra work and if all can be accomplished on my taxes then one and done I hope.

You have $2539 + 324 = $2863 Qualified expenses.

2863 / 5049 = 56.7% of earnings is tax free (43.3% is taxable )

0.433 x 2054 = $889 taxable income. Since this is less than the $1100 filing threshold, the student does not need to file a tax return. The 1098-T and 1099-Q do not need to be entered on your return either; there's nothing to claim.

The 1099-Q and the 1098-T are only an informational documents. The numbers on it are not required to be entered onto your (or your student's) tax return, unless you are claiming a tuition credit or the student is reporting income (taxable scholarship or taxable 529 plan earnings).

Even though the student lived at home, food and lodging (room and board) are qualified expenses for a 529 plan distribution, if she was half time or more student. You may use your actual cost or the school's "allowance for attendance" for room & board (basically what on campus residents pay for R&B), whichever is lower. So, in actuality, she has no taxable income.

Hal_Al

Employee

Q. My taxes say the student beneficiary must report $2054 of taxable income form this distribution. My child doesn't have a job or W2 so does she have to file taxes?

A. Yes, if that determination (she has $2054 of taxable income) is correct. The taxable portion of a 529 distribution is unearned income. The filing threshold, for a dependent with unearned income, is a mere $1100.

Let's first verify that $2054 number. Provide the following info for more specific help:

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.
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?

Hal_Al

Employee

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.