TurboTax said I didn't need to file 1099-Q, IRS wants taxes on earnings distributed (2020 Taxes)

Forum|Forum|3 years ago
May 16, 2022
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Summary: TurboTax said we didn't need to file a the 1099-Q we received from Fidelity, but the IRS now says we owe taxes on the Earning portion of the 529 plan distribution. Advice on how to resolve?

My non-dependent son paid tuition to the community college which we reimbursed later from our 529 Plan through Fidelity. My son files his own tax return and is not listed on our return. His school did provide a 1098-T to him covering the distributed amount.

Fidelity provided a 1099-Q with Box 6 checked ("If this box is checked, the recipient is not the designated beneficiary") to my wife (the owner of the QTP/529 Plan). The actual beneficiary's name/info (our son) is not mentioned on the 1099-Q form.

Going through the TurboTax 2020 questions step-by-step:

Q: Were you the beneficiary of a Coverdell Education Savings Account (ESA)? No

Q: Did you receive a Form 1099-Q for distributions from a Coverdell ESA or a qualified tuition program (QTP)? Yes

Q: Who's shown on as the Recipient on your 1099-Q? Someone else not listed here

Q: Who's the student? Someone else not listed here

Great news! You don't need to report this form

As advised, we filed our 2020 taxes without the 1099-Q.

Now the IRS has written us claiming we did not report the Earnings portion of the 1099-Q (line 2) and we owe taxes on those earnings. The 1099-Q has box 6 checked showing that my wife was not the beneficiary of the distribution, and the true beneficiary name/info (our son) is also not listed on the 1099-Q.

I need to resolve this with the IRS and I feel like the same situation will happen with my 2021 tax return as we filed the same way this last year.

Hal_Al

Employee

You say "My non-dependent son paid tuition to the community college which we reimbursed later from our 529 Plan through Fidelity."

I assume two things: he is the beneficiary of the 529 plan and the 529 distribution was in the same calendar year that the tuition was paid.

You've done nothing wrong (nor has TurboTax [TT]). We're seeing this frequently (it happened to me, personally). Apparently, the IRS has created a problem by not having a form to report the situation where the taxpayer uses all the 529 plan distribution for qualified expenses. Even if you had entered the 1099-Q in TT, nothing about the 1099-Q would have gone anywhere on the actual IRS forms.

You should reply to the IRS that it was all used for qualified education expenses. I attached a copy of my billing statement from the school and that took care of the problem (2-1/2 months later).

But be aware, you cannot double dip. Your son cannot count the same tuition money, for the tuition credit, that gets you the exclusion from the taxability of the earnings (interest) on the distribution. 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. Room & board are also qualified expenses for a 529 distribution (if the student is half time or more).

At least two other users have reported receiving a CP2000 letter, from the IRS, on 529 distributions. They replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They later received a notices saying they were in the clear.

Hal_Al

Employee

As an aside (it should not matter), it sounds like you made an error in Turbo Tax (TT). You say:

"Q: Who's shown on as the Recipient on your 1099-Q? Someone else not listed here"

That's probably not correct. YOU are the recipient, if your name and SS# are on the 1099-Q. But, as previously indicated, 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. So, the result would have been the same.

If your son was the recipient, he should have entered the 1099-Q, on his return. But, again, the result would have been the same, nothing about the 1099-Q would have gone on the actual tax forms.

ddessert314Author

Thanks for pointing out my oversight! It does work out as no additional taxes although the 1099-Q and a worksheet are also generated.

I also called Fidelity who said that since my son was the direct recipient of the funds from Fidelity, his name should be on the 1099-Q form and not my wife's. That would also take it off my tax return altogether but probably force him to add it to his.

At this point, it may be just as well for all involved to file 1098-T information with the IRS and put it to bed. Same outcome and less work for everyone involved (me, my son, and the IRS).