Solved

My 529 earnings are being taxed. I’m the recipient and my son is the beneficiary. What am I doing wrong? All distributions are being used for qualified educational exp

Forum|Forum|6 years ago
June 1, 2019
4 replies
0 views

No text available

TurboTax Deluxe Mac

Best answer by Hal_Al

TurboTax uses parts of your dependent's college expenses to claim the Tuition credit. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free.

For more detail, see: https://ttlc.intuit.com/questions/3742999-i-entered-my-1099-q-and-my-1098-t-to-show-i-used-the-money-for-education-but-the-program-is-charging-me-tax-on-the-1099-q-distributions?jump_to=similar-questions

If your income is too high to be eligible for a tuition credit, see the TurboTax FAQ for a work-around. https://ttlc.intuit.com/questions/4451709-why-is-the-529-distribution-from-my-1099-q-showing-up-as-taxable-incomeDEAD LINK

Hal_AlAnswer

Employee

TurboTax uses parts of your dependent's college expenses to claim the Tuition credit. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free.

For more detail, see: https://ttlc.intuit.com/questions/3742999-i-entered-my-1099-q-and-my-1098-t-to-show-i-used-the-money-for-education-but-the-program-is-charging-me-tax-on-the-1099-q-distributions?jump_to=similar-questions

If your income is too high to be eligible for a tuition credit, see the TurboTax FAQ for a work-around. https://ttlc.intuit.com/questions/4451709-why-is-the-529-distribution-from-my-1099-q-showing-up-as-taxable-incomeDEAD LINK

M

mmkane

The links are broken in the message below.

Hal_Al

Employee

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.

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."

Carl11_2

Employee

My 529 earnings are being taxed. I'm the recipient and my son is the beneficiary.

That's not possible. On the 1098-Q "recipient" and "beneficiary" are the same. The owner of the SSN in the "recipient's TIN" box is the beneficiary recipient. That is the person that reports the 1099-Q on their tax return.

As explained elsewhere in this thread, I suspect you are the custodian of the account.

Hal_Al

Employee

@Carl11_2 .

"I'm the recipient and my son is the beneficiary'' is possible and frequent.

"On the 1098-Q 'recipient' and 'beneficiary' are the same" UNLESS BOX 6 ON THE 1099-Q IS CHECKED.

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.

Carl11_2

Employee

Thanks. Never paid attention to box 6 before.

8

8194Harlem

I am having the exact same experience. Fully qualified expenses are not offsetting the taxable portion of the 529.

Hal_Al

Employee

@8194Harlem You say *Fully qualified expenses are not offsetting the taxable portion of the 529*.

Technically, that's not what you are after. You want fully qualified expenses to offset the distribution itself (box 1 of the 1099-Q). What ever part is not offset is then used to calculate the taxable portion of the earnings (box 2).

If you know none of it is taxable, then just don't enter the 1099-Q, in TurboTax. See explanation above.

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.

8

8194Harlem

The total qualified expenses plus 3 1098-T entered equals the total 529 distributions, yet, by entering it as directed, there is a difference of $800 in Federal Tax due. So you are recommending that I answer "no" to the question about whether I have received a 1099-Q, even though I have?

N

nickl1

I have the same sort of issue. Part of my QTP is being reflected as taxable, even though the entire amount was paid to the school for eligible expenses.

When I look at the form itself, under Qualified Tuition Program (QTP) Computation of Taxable Income, the line 2c "adjusted qualified higher education expenses" are $5,000 less than the total distribution (line 1) as reflected in by 1099 Q. I also entered a $5,000 scholarship as reported on the 1098 T for my son. I adjusted the expenses upward when entering the 1098 T to reflect the actual eligible expenses paid beyond wht was reported by the college, but it's not adjusting the expenses on this form.

I suppose I can just remove the 1099 Q from his return based upon prior advice from the site. It just seems strange that I can't adjust Turbo Tax to reflect the actual situation.

SharonD007

The 1099-Q should be reported on the tax return of the person whose SSN is on the form and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.

To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the scholarship. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it. If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your tax return as ordinary income and you will pay an additional 10% penalty tax as well on that amount. TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.

You can report the 1098-T on your tax return if your child qualifies as your dependent. You may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.

Please see the TurboTax article What Are Education Tax Credits? for additional information.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"