TurboTax is charging a penalty on 529 scholarship withdrawl

Forum|Forum|5 years ago
April 19, 2021
1 reply
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I am not trying to claim any education credits. I understand that I will pay tax on the earnings from the scholarship withdrawl. The problem is that TurboTax continues to charge the 10% penalty on the withdrawl no matter how I enter the information. HELP!!!

Hal_Al

Employee

What are your numbers?

Provide the following info for more specific help:

Are you the student or parent.
Is the student the parent's dependent.
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 1098-Q
Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students.
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
Are you trying to claim the tuition credit (are you eligible)?
Is the student an undergrad or grad student?

angierysanekAuthor

@Hal_Al

I am the parent.

Student is my dependent and an undergrad.

1099-Q has the parent's name and SS#.

No education credits are being claimed (and will not be claimed).

No scholarships are listed on the 1098-T.

This $1500 was the only scholarship awarded and it was part of the CARES Act (so not restricted).

529 qualifying expenses (including the $1500 scholarship) exceed 529 withdrawl.

The tax return shows the amount of earnings taxable due to the scholarship. My only issue is the 10% penalty being charged on the taxable earnings due to the scholarship.

Thank you for your help!

Hal_Al

Employee

@angierysanek said "529 qualifying expenses (including the $1500 scholarship) exceed 529 withdrawal."

Then none of the 1099-Q is taxable. So there is also no penalty. Just don't enter the 1099-Q (or the 1098-T).

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.

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."

The 1098-T and 1099-Q are only an informational documents. The numbers on it are not required to be entered onto your tax return.

Furthermore, Publication 970 makes it clear that you cannot claim the tuition and fees deduction, the American opportunity credit, or the lifetime learning credit for expenses paid with Emergency financial aid grants under the CARES Act. It's not clear that you would be prohibited from claiming a 529 plan earnings exclusion.