Why did TT2020 Created Taxable Income on Schedule 1, Line 8 for a Qualified 529 Distribution

Forum|Forum|5 years ago
April 9, 2021
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Hi,

Very simple situation:

1. Dependent daughter, in college, full-time, first year. No Income to report for 2020.

2. We are not eligible for any education credits due to phase out limits.

3. 529 Distribution was used to pay qualified expenses only; Dollar match was exact to the penny.

4. She has no college loans for her first year.

5. She (as dependent student) received a 1098-T (in her name), with Box 1=34,771 and Box 5=23,140. Total School cost = 57,911.

6. I (as taxpayer) received (as 529 distribution recipient) a 1099-Q. Box 1=17,138; Box 2=7,776; Box 3=9362, Acct type='State'; Box 6 is Checked "Recipient is not the designated beneficiary".

TT2020 form 1099-Q treats distribution as taxable when Line B is checkmarked as "TAXPAYER".

TT2020 form 1099-Q treats distribution as NON-taxalbe when Line B is checkmarked as "DEPENDENT".

-- Line B reads, "Who was the RECIPIENT of the distribution reported on this form?".

A. If the money was used only for her education, why is TT2020 adding Taxable Income to Schedule 1, line 8?

Is this a logic error in the software code?

B. Should I complete a tax return for her and include both the 1098-T & the 1099-Q?

C. Should I delete the 1099-Q from my 1040 Federal Return packet, but hold on to the Brokerage document to back up an Audit?

D. Next year should I have the distribution deposited to her savings account?

E. Other options?

I'm using TT 2020 Premier, Version [phone number removed]

on an HP Pavilion PC running Windows 10 Home Edition (Ver. 10.0.19042 Build 19042).

Thank you.

El_Norte_2020

San Diego

Hal_Al

Employee

@El_Norte_11196 said: "Box 1=34,771 and Box 5=23,140. Total School cost = 57,911"

That's not correct. Total, out of pocket, school cost is $34,771 - 23,140 = $11,631, unless you have additional info other than what's shown on the 1098-T. Room and board, books and computers are not shown on the 1098-T. You also said "Dollar match was exact to the penny". I'm not seeing that in the numbers you provided.

Q. Should I complete a tax return for her and include both the 1098-T & the 1099-Q?

A. No. Since you are the "recipient" of the distribution and she is your dependent, nothing gets entered on her return.

Q. Should I delete the 1099-Q from my 1040 Federal Return packet, but hold on to the Brokerage document to back up an Audit?

A. Yes, if your room & board and other expense add up to $5507 or more. The TT interview is too complicated. If you know none of it is taxable, just don't enter it.

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.

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."

Q. Next year should I have the distribution deposited to her savings account?

A. No. As long as none of it's taxable, do what's convenient. If you ever took too much, the taxable portion is unearned income and subject to the "kiddie tax" on her return, so it get's (mostly) taxed at the parent's rate anyway.

El_Norte_11196Author

Updated April 15, 2021:

I called my daughter's college and it seems they applied her Spring 2021 Scholarship & Grant money in December 2020. However, I didn't pay the balance due until January 2021. So on the 1098-T, it looks like she received the Scholarship money twice in the Fall 2020 term. The difference between Box 1 and Box 5 appears much smaller as a result. TurboTax saw my 529 Distribution as being higher than necessary, which caused it to view the excess as Taxable Income. This doesn't seem to reflect the reality of the situation, and I see the flaws now more clearly in the way the 1098-T form reports the financial transactions.

I also learned from talking with the school that Room & Board expenses are not reported in Box 1 of the 1098-T, as on that form they are not defined as "Qualified Tuition and Related Expenses". However IRS Publication 970 clearly states that Room & Board are Qualified Higher Education Expenses that can be covered by a 529 distribution. I have all of the supporting documentation from the school, so I believe the correct path for me is to not include the 1099-Q in my return.

Hal_Al

Employee

Q. "I have all of the supporting documentation from the school, so I believe the correct path for me is to not include the 1099-Q in my return"?

A. Yes.

For others reading this, As to the two other issues:

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2020 expenses".