How do I report a non qualified 529 withdrawal and avoid 10% penalty based on the montgomery GI bill?

Forum|Forum|5 years ago
February 7, 2021
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My dependent joined the military in 2020 and is signed up for the montgomery gi bill. I took a non qualified withdrawl from the 529 account becuase he no longer needs it. Can I avoid the 10% penalty and how do I reort it in turbo tax?

Hal_Al

Employee

Yes, you can avoid the penalty, for the reasons stated, and TurboTax handles this.

Q. How do I report it in turbo tax?

A. Very carefully. First enter the 1099-Q. Then enter his expenses & Veteran info at Education expenses. Be sure to include room and board as expenses. It may reduce the taxable portion of the 529 distribution.

In TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

--ESA and 529 Qualified Tuition Programs (1099-Q)

Then

In TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

--Education Expenses

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.

bobski1776Author

can I still avoid the penalty if he is still on active duty and can not use this benefit yet?

Hal_Al

Employee

Q. can I still avoid the penalty if he is still on active duty and can not use this benefit yet?

A. No. The penalty is waived only if there were actual educational expenses and those expenses were already covered by some other tax benefit (scholarships, Veterans benefits, tuition credits or deduction).

If you are merely cashing out in anticipation of not needing the money, for education, in the future, that doesn't count for a penalty waiver.