Why is Turbo Tax saying my child will owe taxes on 529 distribution

Forum|Forum|4 years ago
February 12, 2022
1 reply
0 views

My child started college and has payments of $11000 given directly to the University he is attending. (Amount shown on 1098-T) He has no scholarships or other income for the last year and we are claiming him as a dependent.

The 1099-Q distribution went directly to the University. The gross distribution was under $6000 and the earnings was about $2,500. Turbo Tax is saying that the $2500 is taxable to our child.

We are not able to take a deduction of higher education expenses due to our income level exceeding the federal limits.

I don't understand why the earnings are taxable. We thought the whole point of the 529 was that the earnings were tax exempt.

Any community Wisdom?

Hal_Al

Employee

Do not enter the 1099-Q.

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. 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."

TurboTax can theoretically handle entering the 1099-Q, then entering all the expenses. But that's long, and complicated and mistakes can be made.