How to handle 529 distribution for off-campus rent and food expenses

Forum|Forum|3 years ago
March 13, 2023
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In 2022 two of my children had expenses for housing and food that we paid for out of 529 disbursements. Our financial advisor cut us checks for each son's expenses and then we paid for these qualified educational expenses. When the 2022 1099-Q forms came they were in my wife's and my name. instead of our children's. I entered the information into the deductions and credit section of TurboTax and they caused our federal and state tax owed to go up. These should be tax free due to their qualified nature, but I'm not sure how to enter them online to reflect that. Should I not enter these particular 1099-Q data points or is there some other procedure I'm missing?

Hal_Al

Employee

Q. Should I not enter these particular 1099-Q's?

A. Yes, since you know they are not taxable. TurboTax is getting it wrong.

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."

5857196036Author

Okay, that makes sense but am reassured by getting your perspective. It wasn't clear in the IRS documentation or the TurboTax interview on how best to handle.

That reduces what we owe in our federal taxes and swings our state taxes to a small refund.

Thanks for your quick reply!