Who reports the 1099Q?

Forum|Forum|6 years ago
June 1, 2019
2 replies
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My daughter is the recipient of a distribution from a 529 Plan owned by my father (her grandfather). The 1099-Q was sent to her and displays the last four of her SSN.

Who reports the distribution for tax purposes: my father (grandfather/owner of the 529), my daughter (the beneficiary, but who has nothing else to report on a tax return), or me (because she's already listed as my dependent) ? Thanks for your help.

TurboTax Premier Windows

ToddL

Employee

Edited 02/10/2017 at 10:04 AM PT.

The person who receives the funds (whose SSN is on the 1099-Q ) has to report the Form 1099-Q on their tax return (If the money went straight to the school, it is treated as going to the student).

You can enter the Form 1099-Q in either the Wages & Income section or the Deductions & Credits section of Federal Taxes,

(If entering in Wages & Income, the Coverdell ESA and 529 qualified tuition plans interview is found under Less Common Income > Miscellaneous Income).

(If entering in Deductions and Credits, the ESA and 529 qualified tuitions interview is found under Education).

If the beneficiary is listed as a dependent on this tax return , you will have to complete the Education Expenses interview, including entering the Form 1098-T.

If the beneficiary is not listed as a dependent on this tax return (e.g. grandchild), you will have a screen to enter information about that student and their expenses. Unlike the Education Expenses interview, you can enter Room and Board costs (see attached screenshot).

squeezil1Author

Thank you.  I have a few follow-up points & questions:

1)  She has never filed a tax return because she has no income
2)  The Earnings on the distribution from the 529 Plan were less than $22 (per the 1099-Q)
3)  In light of these two points, do I still need to create a new tax return for her in TurboTax so that she can complete the Education Expenses & Scholarships interview?
4) Alternatively, can she complete that interview in my tax return because she's still my dependent, the amount of Earnings is so small, and has nothing else to report?
5)  We've not received a Form 1098-T.  Should we be expecting one, and who would issue it (would it come from the University?)

Thanks again.

Trstno1

My daughter will receive a large tax free tuition scholarship. For the 2021 calendar year, it will be $17,500. We intend to take a non-penalty matching distribution from a 529 plan that is owned by her grandparents. She will have no other income to report. She can be claimed as a dependent on her parents return.

Is it correct that the earnings portion of the 529 plan distribution should be reported as unearned income on my daughter’s tax return? Is it correct that long term capital gains will have a 0% tax liability (because her earned income is less than $39,000), and that short term capital gains will have a 10% tax liability up to the first $12,000 in earnings? Can I expect earnings to be broken down into short- and long-term capital gains and dividends on her 1099Q?

Thank you - this all seems so complicated.

Hal_Al

Employee

Q.Is it correct that the earnings portion of the 529 plan distribution should be reported as unearned income on my daughter’s tax return?

A. Yes, if she is the recipient (see below*). The grandparents have the option of requesting the fund send the money to her, them or the school.

Q. Is it correct that long term capital gains will have a 0% tax liability (because her earned income is less than $39,000), and that short term capital gains will have a 10% tax liability up to the first $12,000 in earnings?

A. No. 529 distributions are treated as ordinary income; even though the earnings, within the fund, may have originally come from capital gains and/or qualified dividends.

Q. Can I expect earnings to be broken down into short- and long-term capital gains and dividends on her 1099Q?

A. No. The distribution will just be reported as earnings (box 2 of the 1099-Q) and basis (box 3). The total distribution will be in box 1. The box 2 amount is the taxable amount.

Q. This all seems so complicated.

A. It is and it gets more complicated. Another alternative is have the student report some of her scholarship** as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Taxable scholarship is treated as earned income for purposes of the standard deduction (but not the "kiddie tax"). The student gets a $12,400 deduction, instead of only $1100.

Another issue: Room and board, are qualified expenses for a 529 distribution (but not for a tax credit or tax free scholarship).

*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.

**There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.