529 Distribution is taxable?

wings9798 2024-03-11 23:44:18 UTC #1

1099Q Distribution $10,000 Earnings $3,187.71 Basis $6,812.29 State X; Recipient is Not Beneficiary X

Parent is listed as recipient and their SSN

1098 T in Daughters name Payments $12,476 Scholarships Grants $9500

There was an additional $16,000 paid in room and board. The parent is being asked to pay a tax on the earnings. The qualified expenses exceed the distribution amount. I thought disbursements from a 529 that are used for qualifying expenses.

Anyone have any ideas on why the earnings are being taxed? Does it have to do with MAGI ?

Thanks

dcandmc 2024-03-12 12:25:39 UTC #2

Who says the earnings from the 529 distribution are being taxed? Was a notice from the IRS received? More information is needed. And no, if the net qualified expenses (after grants and scholarships are taken into account) equal or exceed the amount of the 529 distribution, there should be no tax owed. MAGI has nothing to do with it.

wings9798 2024-03-13 00:25:53 UTC #3

After more research, I think Turbo Tax has a bug, since I’m over the AGI to claim expenses I think TT doesn’t Calculate the expenses. After discussing I decided not to enter the 1099q into TT. I can easily prove the $10k distribution had eligible expenses.

dcandmc 2024-03-13 15:18:50 UTC #4

Over the AGI to claim expenses for what? Again, there is no AGI limit for using untaxed 529 money to pay for qualified education expenses.

wings9798 2024-03-25 16:31:00 UTC #5

In Turbo Tax, when you go to enter in college expenses it is not available if the AGI is over the limit. I'm assuming that Turbo tax uses this information to offset the 1099-Q when entered in. Since I can't enter in expenses, TT assumes the 1099-Q is taxable when it is not.

I removed the 1099-Q from TT and if audited I'd easily be able to prove I paid $10,000 in college expenses.

dcandmc 2024-03-27 14:29:09 UTC #6

I don't use Turbo Tax, so I can only guess what it is doing, but it sounds like the program is using an AGI limit that pertains to education tax credits (American Opportunity Credit and Lifetime Learning Credit). Both credits have modified AGI limits of $180k for MFJ taxpayers, and $90k if you are filing as single, head of household or qualifying surviving spouse. As stated previously, there is no AGI limit for using tax-free 529 distributions for qualified education expenses.