Turbo Tax Question

[whickoryn]

My 529 distributions in 2006 were issued in the names of the beneficiaries, my son and daughter. I received the Form 1099-Q forms today and input the data in two places within Turbo Tax - In the "Other Income" section there is a box to check for 1099Q's and in the "Education" section within Deductions and Credits. The income and deductions sections basically offset each other, resulting in no additional tax. However, when I print the return, I don't see any notation where it shows the distribution and qualified education expense. There are no schedules or attachments either. The 1099-Q is sent to the IRS...how do they know that it was applied to qualified education expenses???

[Joseph_Hurley_SFC]

The IRS systems presumably won't attempt to match the 1099-Q to your tax return. If they did, they would have a big mess on their hands because the distribution is not reported on your return when it is 100% tax-free. If your return were audited, then you would have to document the qualified expenses.

Joe

[meb24]

whickoryn:
Just looked at my daughter's tax return from last year, which was completed using TurboTax online. There is a page for the 1099-Q attached called "Payments from Qualified Educations Programs" with the info that I input last year, showing the Gross Distribution/ Earnings/and Basis. There is also a page attached for "IRA / ESA /QTP Distribution information Worksheet (showing Total qualified expenses) -- I don't know if these forms actually go to the IRS, but they did Print Out when I completed the return last year. However, there is no reference on the 1040EZ regarding the 529 info.

I haven't completed this years taxes yet so I don't know if it's changed so that I won't get a printout of the 1099-Q info & QTP Dist.Worksheet.

meb24

[itstoomuch]

I use Tax Act (cheaper). TaxAct asks for QTP's only in the Education section. There is no entry in the Income Section.

Reporting Question: This year 2006 we had son start his own 529 since we do not need the tax credit. He also had a distribution from the 529. We also closed out the 529 that we started as custodians/owner. So this year we get 2 - 1099-Qs with both of them showing son as the beneficiary, and no where does the 1099-Qs indicate the ownership other than the account numbers. So the program asks how much was the distribution in the recipients's name. Just by following the instructions, I do not report the distribution of the parent's ownership but do report it in the beneficiary's tax report. - What this means is that if there is an overfunding, or nonqualified distribution, the beneficiary-recipient takes the penalty and income tax hit? Does this seem correct?

We have always had distributions sent directly to the school. The contributions have been limited to $2000/yr for the state credit and rebalance. 2006 is the last year we have to track it.

[lukester]

My head is starting to hurt listening to all this as we are in a similar situation. First timers (son is a freshman) with the 1099-Q and 1098-T. It sounds like some of you are filing the 1099-Q on parents taxes and some on the students taxes. Can you do it either way? Our 1098-T can in our son's name from his University. The 1099-Q came in with son's name as recipient and my name as the Custodian. It may be more beneficial for us if we put all this on our son's taxes. Anyone care to comment?

[Joseph_Hurley_SFC]

The ownership of the account does not matter. It's the recipient who matters. If the distribution was made to the beneficiary, or directly to the school, the beneficiary is the recipient, the 1099-Q will show his/her social security number, and any taxable earnings will be reported on his/her return. If distributions are tax-free, they do not have to be reported on the return. If the distribution went to the account owner, then the account owner's social security number will appear on the 1099-Q and any taxable income is reported on the account owner's return. Again, if the distributions are tax-free (based on the beneficiary's expenses), nothing is reported on the return.

The 1098-T you received from the school can basically be ignored. It was developed for the Hope and Lifetime Learning credits anyway.

Joe

[lukester]

Joe, Ref your commment about "ignoring the 1098-T". How do we document on our taxes the taxable amount of the scholarship that we must pay? Our qualified educational expenses are minimal and much less than the addtional scholarships that are not non-taxable.

[meb24]

Lukester:
If you are completing the 1040 manually, like Joe said, if the distributions are tax-free you don't need to show it on the 1040/1040A/1040EZ.

When working with TurboTax, however, they do ask questions about receipt of 1099-Q & 1098-T, but it just completes a worksheet with the inputted data that you can keep for your records (you don't see this until after printing), again if tax-free the info doesn't show up on 1040.

Like your situation, my daughter rec'd 1099-Q & 1098-T. I inputted the 1099-Q info (shows up as income at first, but then when you get to the Education Credit info and list the Qualified Expense total, as long as the expenses are equal to or greater than the 529 Distribution it removes the amount from the income)

Also, since your son is a first year student, you may qualify for Hope Credit ($1,650 this year).

For my daughter's first two years (This being her 2nd yr). I paid in cash up to the amount to claim maximum credit. (Last year paid $2000 - got a $1500 credit) (This year paid $2200 - getting $1650 Credit). Used 529 for all other qualified expenses. There may be MAGI limitations so check IRS publication 970.

***I only see publication 970 up to 2005 - Does anybody know if there is new info & the publication is pending???? When I requested Form/Publications from the IRS about a month ago, this is the only one still pending receipt.
Hopefully, there are no changes that will effect returns already submitted.

Hope this info helps.

meb24

[meb24]

Lukester:

Are you filing manually or using tax software for efiling? Did you received W2's or 1099-Misc for the scholarships?

meb24

[lukester]

Joe and Meb, You guys are great. Thanks for responding. I am filing electronically via TT Deluxe. I am starting to see how this will eventually work out. We have a Good News/Bad News situation. The good news is that we were blessed with a smart kid who was able to be awarded 100% of costs for college. He even exceeded the max allowed by the college. The bad news is that we paid almost nothing ($90 was all) last fall for his education. That means once I input all the data from the 1098-T and 1099-Q, we will show an increase in taxable income. Bummer, but a good problem to have, we aren't complaining too loudly. If I can legally do it, I will see if it is cheaper to file it on his taxes versus ours. Best I can tell the 2005 version of Pub 970 is still the most current. Keep the suggestions coming!

[lukester]

P.S. We did not receive a W-2 or 1099-Misc for the scholarships. We received only the 1098-T from the University and the 1099-Q from our State PPT program.

[Joseph_Hurley_SFC]

Lukester,

It's difficult to comment without knowing your whole situation. Sounds to me like your son received a non-taxable scholarship. If he received a taxable scholarship (e.g. for room and board) he would report it. He would also report any 1099-Q earnings attributable to the QTP/529 distribution he received in excess of the expenses he incurred (net of non-taxable scholarship). He would not have to pay the 10% penalty (Form 5329) to the extent the excess 529 distribution stayed below the amount of tax-free scholarship. If he did not pay any tuition (due to the scholarship) then there is no Hope or lifetime learning credit available to either you or him.

Hopefully, when you put it all into the tax program he will end up with zero income tax. If he shows an income tax, you can consider claiming some of the tax-free scholarship as taxable, which will permit you or him to claim the Hope credit which may wipe out the tax even after the extra scholarship income.

No wonder people complain about how complicated the tax law is.

Joe

[lukester]

Joe, Our son was awarded two large scholarships from the school ($25,000 + $7,500) and one from the state of SC ($6,700). The University capped the total at $37,157 per year. All three scholarships can be used toward qualified expenses (taxable and non-taxable) only, which includes tuition as well as R&B. He can't use the money for pizza, gas, etc. It looks to me, that not only will we NOT be able to take advantage of the Hope, I can't think of any way to reduce the taxable amount we will have to pay taxes on. I remember writing one check last fall for $90 for a book, but that was it.

[itstoomuch]

Lukester:

Our son has a similiar situation as a grad student. His money is being disbursed by scholarship, grant, teaching, fellowship, and stipend. Out of this he pays the tuition. He gets an added complication in that this occurs in Canada... so does this make he money he gets, foreign, and thus US tax free?

Sometimes its best to give the problem to someone else. The tax professional gets the problem these couple of years.

PS. Son should be very happy to pay taxes. I 've done a fairly accurate test on the tax program- its not going to be pretty, especially when he may need to pay estimated tax this year

[whickoryn]

Lukester,

Since you stated that the 1099-Q was issued to your son's SSN as recipient, you will have to include the distribution on his tax return...that's the good news.

Here's what I discovered with my daughter. The following are approximations: Total qualified 2006 education expense = $40,000. Total distribution reported on 1099-Q = $40,000. Earnings portion reported on 1099-Q = $4,000. Tax-free scholarship = $10,000 (25% of total expense).

So under the other income section in TurboTax, you input the data from the 1099-Q. Under the Higher Education Expense section you input $40,000 qualified expense, then you input $10,000 under tax-free scholarships.

As you probably know, you can take distributions for amounts equal to the scholarship without penalty, but you will still incur taxes on the gains related to those distributions.

When I looked at my daughters 1040, there was now an amount under other income of $1000 that represented 25% of the total gain shown on the 1099-Q. This all made sense to me based on the above. Next TurboTax asked if she qualifid for an education credit or deduction and if I input yes it said that she does not qualify because she is reported as a dependent on someone elses return...mine!

I played with the scenarios to see if the combined tax would be lower if I did not claim her as a dependent (don't really know if I have the option?), but in my case it was better to leave her as a dependent. Now the good news. I looked at the marginal tax rate related to the additional $1,000 other income on her return and the tax rate applied to those extra dollars was only about 10%. I'm sure it would have been much higher if I had requested the distribution be made to myself.

In your case, since almost 100% of your distribution will be taxable on your son's return, it may make more sense for you to not claim him as a dependent and explore additional education deductions or credits. He will alsostart off with a standard deduction of $5,150 and a personal exemption of $3,300!

One of the nice things about the tax software is that it lets you try different scenarios. Hope this helps.

[lukester]

Whickoryn, PERFECT! I think you have made an excellent suggestion for us. You are right, both the 1098-T and 1099-Q are in my son's name and SSN. I will play with both options of filing under his tax return and under our tax return. I do have him currently claimed as a dependent under our tax return. Since I know we will NOT be able to take advantage of any Hope tax credits, does it matter which return he is claimed as a dependent? From what I could read in the IRS Pub 970, the dependency claim is crucial only when one is claiming the Hope or Lifetime Learning tax credit. We won't qualify for those. I think I can play with both options of claiming him as a dependent and be legal.

[meb24]

Lukester,

Wonder whether if not claimed as your dependent- would status for Medical insurance change. If student is still covered under parents insurance, would they be dropped since giving up claiming them as an exemption would indicate you are not providing over one-half of their support. - Just a thought, since medical coverage may be more costly than the savings on taxes.

meb24

[whickoryn]

Very good point meb24. First, I don't know if one has the option of not claiming a child as a dependent when all of the tests have been met. Second, I really don't know all of the ramifications associated with not claiming a child as a dependent has on things like medical insurance. Are they tied together or separate tests to qualify? Maybe someone else who reads this has some experience. Whickoryn

[itstoomuch]

Thankyou, Wickoryn, I've never thought to place son on independence status maybe because of habit. By changing his status to nondependent, his taxes will go down 83% and our taxes will not go up (we have a dependent parent with medical expense).

I will however keep him as our dependent on principle for inclusion to our medical, auto, and legal insurance for which we pay about what he would save on his taxes. If he was an independent, he would definitely incur more in personal insurance premiums than what we together would save on taxes.

? If I remember, We can claim a dependent for a full year even if a dependent for a partial year. ?But an Independent can Only be called an independent, if independent for a Full year.

[lukester]

Where Do Find the Total Education Expense for your child's school? I am using the figures supplied by the school through their Bursar's web site. What does everyone else use?