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April 18, 2020
Question

How to enter my daughter's education expenses in 2019...

  • April 18, 2020
  • 1 reply
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I have following questions:

a) My daughter graduated from her law school after Spring 2019.  However, she took a few classes in the Spring 2019 Semester. 

b) She was living with us. Now she moved out in late September 2019. 

c) My question #1: How do I enter my daughter's education tuition fees of $16K in 2019 tax return?

                           #2: The fund came out of my Maryland 529 College Saving Plan which I saved over many years for my daughter's college education?

 

Thanks,

 

Shiva 

    1 reply

    Hal_Al
    Employee
    April 18, 2020

    Simple answer: you have nothing to claim, since the tuition was paid by a 529 plan.  Do not even  enter the 1099-Q.

    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." 

     

    But taxes aren't simple.  You may want to pay a little tax on the 529 distribution so that either you (if she was your dependent****) or she can claim the tuition credit.  The tuition credit is worth 20%  of the first $10,000 paid. If you/she are in a lower tax bracket, that would be the smart move.  The tuition credit is non refundable. That is, it can only be used to reduce your taxa liability.  The more generous AOC credit is not available to grad students. 

     

    Read on for more detail

    __________________________________________________________________________

    Qualified Tuition Plans  (QTP 529 Plans)

    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 $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.

     ***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.

    _________________________________________________________________________

    **** As to the question of whether she is your dependent for 2019.  "She took a few classes" sounds like she was not a full time student.  That most likely means she cannot be your dependent unless her total income, for the year, was less than $4200.

    There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit. 

    A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

    1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
    2. He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student.
    3. He lived with the parent (including temporary absences such as away at school) for more than half the year

    A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

    1. Closely Related OR live with the taxpayer ALL year   (not even one night at the non-custodial parent’s home).
    2. His/her gross taxable income for the year must be less than $4200 ($4150 in 2018)
    3. The taxpayer must have provided more than 1/2 his support

    In either case:

    1. He must be a US citizen or resident of the US, Canada or Mexico
    2. He must not file a joint return with his spouse or be claiming a dependent of his own
    3. He must not be the qualifying child of another taxpayer

    See full rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Return/INF12139.html