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February 18, 2021
Question

I don't understand why I need my parents information since my 529 college plan is under my name and every withdrawal was for school with receipts for each. Please help

  • February 18, 2021
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Hal_Al
Employee
February 18, 2021

"every withdrawal was for school with receipts"

 

Then you've entered something wrong.  TurboTax has calculated that some of the 529 distribution is taxable.  The taxable portion is considered unearned income and has triggered the "kiddie tax" (taxed at parent's tax rate).The interview is long and complicated. You probably need to enter books and room & board.

 

But better yet, just delete 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." 

 

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. 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.

________________________________________________________________________________________

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 $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.

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.

 

February 18, 2021

Currently, I am independently claiming my taxes, so my parents are out of the question.  From your does it suffice to say that the best route is to not file both the 1099-Q or 1098-T forms to avoid double-dipping?

Hal_Al
Employee
February 18, 2021

Q. Currently, I am independently claiming my taxes, so my parents are out of the question. Right?

A. Not necessarily.  The "kiddie tax" is applied for an unmarried,  Fulltime student, under 24, who does get more than half his  support from earned income. This rule applies whether you are a  dependent or not.  

 

Q.   Does it suffice to say that the best route is to not file both the 1099-Q or 1098-T forms to avoid double-dipping?

A. Not necessarily.  You want to claim the very generous  American Opportunity Credit (AOC) even if it means paying some tax  on the 529 distribution.  But, that same, under 24, support by earned income rule also applies to the refundable portion of the AOC. Are you eligible for the AOC? Do you have enough income to have a tax liability?

 

Which brings up another issue, if TT is triggering the "kiddie tax", what makes you think you are not your parent's dependent? It's possible, but unusual.  In particular, you said "my 529 college plan is under my name". That's unusual. The parent is usually the owner and the student only the beneficiary and that means the 529 money is not self support.