lifetime learning credit and 529

Forum|Forum|3 years ago
March 26, 2023
2 replies
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My husband and I contributed to a CHET Account (Connecticut's Qualified Education Program) in January 2022 and named our daughter as the recipient. She is not claimed as a dependent on our return. (She is 28 and has been living on her own for a few years). The 1099-Q received is in her name and SSN, and she is named as the recipient. This was considered a gift from us to her.

She turned around and immediately used the funds to pay her tuition bill. She has the 1098-T from the university. She used the funds to pay for her masters degree classes in teaching.

Can she claim the Lifetime Learning Credit even though my husband and I received a tax benefit by contributing to this account?

Thank you for your help.

TurboTax Home & Biz Windows

SharonD007

It depends. Your daughter may qualify for the Lifetime Learning Credit if it is not for the same expenses that the CHET account was used for. For example, If the CHET withdrawal was $5,000 and the tuition plus qualified educational expenses are $10,000, she can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your CHET account will be reduced by $5,000.

Please see the TurboTax articles Guide to Tax Form 1098-T: Tuition Statement and What Are Education Tax Credits? for additional information. You can also take a look at the TurboTax article Guide to IRS Form 1099-Q: Payments from Qualified Education Programs for further details.

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Hal_Al

Employee

Q. Can she claim the Lifetime Learning Credit (LLC) even though she was the recipient of a QTP (Qualified Tuition Plan) distribution?

A. Simple answer: No.

But more accurately, she can not double dip. She can not use the same educational expenses to claim a tuition credit and also claim that the 1099-Q is tax free. But she is allowed to allocate those expenses for the best tax advantage. For most people, that means she should claim the LLC, even if it means paying some tax on the earnings portion of the 1099-Q. The LLC is 20% of tuition paid, up to $10K. Claiming a tuition credit is a penalty exception, so even though tax may be due on the 1099-Q, there will be no 10% penalty. In addition, room and board (even if she lives at home) is a qualified expense for a 1099-Q, if she is a half time or more student.

For more specific advice, provide the following info;

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 1099-Q
Room & board paid. If student lives off campus, what is school's R&B on campus 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
Was student half time or more

valeriefields1Author

For more specific advice, provide the following info;

Box 1 of the 1098-T is $9,173.00
box 5 of the 1098-T is blank
Any other scholarships not shown in box 5 - no scholarships
Does box 5 include any of the 529/ESA plan payments (it should not) Box 5 is blank
Is any of the Scholarship restricted; i.e. it must be used for tuition - no scholarships
Box 1 of the 1099-Q is $9,363.99
Box 2 of the 1099-Q is ($153.91) (negative)
Room & board paid. If student lives off campus, what is school's R&B on campus charge. Student lived home, but was not charged for this luxury 🙂
Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers - no other qualified expenses. Since it was her last semester she was student teaching.
How much taxable income does the student have, from what sources - Adjusted gross income was $26.224. She earned this student teaching during her last semester, working as a camp counselor during the summer and working as a teacher substitute while waiting for her certification to be processed, working as a full time teacher when said certification became final. After a $300 adjustment for teaching supplies she purchased for her classroom, and the standard deduction, her taxable income was $13,274
Was student half time or more. She was considered halftime or more. Box is checked on 1098T

Thank you for your help!

Hal_Al

Employee

EDIT 3-29-23: Poster states that the box 2 amount on the 1099-Q is a negative number. This means that there are no earnings in the distribution and no part of the distribution will be taxable, even if none of it was used for educational expenses. You can choose not to enter the 1099-Q at all. Even if you do enter it, TT will calculate 0 income.

The rest of this reply assumes that there was a positive amount in box 2 of the 1099-Q.

She can claim the LLC and will pay tax on all the 1099-Q earnings ($154). She's in the 12% bracket, so about $18 in tax. Technically there is a tiny amount of penalty, since the distribution exceeds her tuition, but rounding should take that to 0.

Even if she lives at home ("off campus") she is allowed to claim room board for the 1099-Q. She can claim the lesser of her actual cost or the school's "allowance for attendance" (essentially what on campus student's pay. This number is usually available at the school's web site. But, in your case, it will not affect your bottom line.

The LLC is 20% x $9173 = $1834. Her tax liability is only about $1400 (including the $18), so the LLC wipes that out. The LLC is non refundable (she doesn't get the extra $434 +/-, in her refund).

But this means, you have to enter everything in TurboTax (TT) and hope TT gets it right. Enter the 1099-Q before you enter the 1098-T. When you enter the 1098-T, you should eventually get a screen "Amount used to calculate the credit or deduction". That amount should be $9173. You will be given a chance to change it.

If you don't get the results expected, reply back, I'll give you a workaround.