Why does TurboTax continue to fail in handling 1099-Q and qualified 529 distributions?!!

I have found the best way to treat the 1099-Q distribution in TurboTax is to enter the distribution first, then enter your form 1098-T expenses and scholarship income. That way, you will be asked to enter your room and board expenses, which may not appear if you enter your form 1098-T expenses first.

If you enter things in this order, your income reported on your 1099-Q should be properly accounted for in TurboTax.

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. 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.

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." 

It's a complicated situation and the interview, by necessity, is complicated. But when the info is entered correctly, TT does handle it correctly. But, it's a good idea to review the worksheets and may actually be easier to make the corrections there, as you did (not available to online users).  In particular,  TurboTax usually  assumes you will claim a Tuition credit. So it reduces the amount used for the earnings exclusion, on the 1099-Q, for the amount used for the credit. When you get to the screen, in the interview,  titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

You are not allowed to double dip. You cannot claim expenses for the 529 distribution that were used for the tuition credit or were covered by tax free scholarship. Sometimes part of the 529 distribution ends up being taxable, even though it's the same amount as the expenses.

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Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

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.

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." 

***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. Most people come out better having the scholarship taxable before the 529 earnings. 

Crazy! Same thing just happened to me. Had already entered 1098-T and then entered 1099-Q. The 529 contributions were already taxed and all distributions were used for tuition. TurboTax mis-calculated and increased taxes and reduced refund. This is clearly not correct. I went from getting a substantial refund to owing money. Called TurboTax and they said to enter 1098-T and delete 1099-Q. This is BS. I've been a TurboTax user every single year since the 80's and since I switched to TurboTax on-line, the product has gotten worse every year. Way more clicks and useless screens of information to navigate through that add no value other than trying to extract more money from my pocket for Intuit.

I'll bet many less astute customers are over paying taxes due to this.

Ugh. I have spent the last two hours dealing with this. My son had some income in 2020 so we used TT to work on his returns which asked for the 1099-Q info (of which he is the beneficiary because Fidelity paid the school directly) but it prevented him from entering college expenses because he is a dependent on our taxes. The result was that he had an additional "$2,000" in income that he owes taxes on according to TT - which makes no sense at all. 

Hello, I have 3 kids in college with 1099-q. Why does turbo tax allow me to put the 1099q on our return and let’s me choose what child it goes for when TurboTax says in its help menu that 1099-q must go on the students return due to the ss number. It is easier this way as expenses are already documented. 

also I read on this thread that you can  have the 1098t on both the parents and the students return to correctly enter the 1099-q if they 1098-t is on the parents return??? 

thanks for your help. 

Still broken in 2022 for 2021 tax year. If 1099-Q was for qualified tuition expenses watch carefully if you enter it as it will likely incorrectly reduce you refund.

Intuit, please fix this or at least provide guidance in the product when and where we are entering this info. Would prefer you spend more time getting the taxes right than trying to up-sell us on the more expensive version.

The thing is with the 1099-Q, it does not have to be reported.   Funds distributed from a 529 Plan, will be reported by the bank on a Form 1099-Q.   The 1099-Q is sent to the owner/recipient of the 529 Plan funds.   The Form 1099-Q is to be reported as income if they were not used to pay qualified college tuition/ expenses.    If the amount reported on the 1099-Q were used to cover qualified college tuition/expenses you do not need to report the income.  If the amount exceeds the amount of college tuition/ expenses then the excess needs to be reported as other income on your 1040.   

This is true for the 1098-T, if you are not eligible for the 1098-T because you took a distribution from a 529 Plan to cover your tuition/expenses, room and board, books, etc. then you do not need to report the 1098-T on your return.  

To determine whether or not you need to report the 1099-Q and/or 1098-T, if the 1099-Q distribution is enough to cover the tuition in Box 1 and the room and board, other expenses you do not have to report either form as you would not be eligible for the 1098-T.   We now have to determine how the amount of scholarships may affect the outcome.   Subtract the amount of scholarships/grants in Box 5 of the 1098-T from the amount in Box 1.   Is this amount plus the room and board and other qualified expenses still equal to or more than the amount of the 1099-Q?   If so, you do not have to report the 1099-Q or the 1098-T.   

On the other hand, if the amount in Box 1 is less than the amount in Box 5 where there is an excess of scholarship funds you may have to report this excess as income.   If the tuition/expenses and the room and board and other qualified expenses are still equal to or more than the total amount of the 529 distribution you are still good and do not have to report either document unless there is enough excess that you may still qualify for the tuition credit.    Now if the amount ends up being less than the 529 distribution, then you have to report this excess as income on your tax return.   This can be done by adding the amount on Line 8f of Schedule 1 (other income) or you can enter the 1099Q and the 1098-T.   If you choose to enter the forms, make sure you add the cost of room and board and other eligible education expenses.   Qualified expenses are amounts paid for tuition, fees, and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution.

Having problems with this STILL in Feb. 2023 😞

I have to include the 1099-Q because of how our state handle the 529 distributions.

Hope I can figure it our.

There are multiple ways to work around this, but I think it's easy enough to have the software address this correctly if the information is entered as there are times when it is required.  I'm having the same issue with the tax being figured incorrectly.  In my case, the root cause appears to be the education tax credits and what happens if you don't qualify because of your income.  The software appears to first attempt to see if you qualify for a tax credit because it's more beneficial, so far so good.  The problem seems to be that once the tax credit is disqualified, turbotax doesn't use the tuition (and it shouldn't if you have a tax credit) in the 1099-Q calculation so it underrepresents your deductions, says you took an excessive distribution from your 529 and therefore owe taxes.  This is a very simple code fix, which with any luck turbotax will undertake.