1099-Q when used for tuition

[jshtax]

If this is answered somewhere already just direct me to the response as I was not able to locate one.

How do you handle this if all expenses are for education? My understanding is you only report earnings if pulled out for non qualified expenses. A client received a letter asking for tax and penalty and all funds were used for college for his kids so the gain was not reported under other income. Is there a spot you include the qualified expenses I am not seeing somewhere?

[Guest Taxed]

If this is answered somewhere already just direct me to the response as I was not able to locate one.

How do you handle this if all expenses are for education? My understanding is you only report earnings if pulled out for non qualified expenses. A client received a letter asking for tax and penalty and all funds were used for college for his kids so the gain was not reported under other income. Is there a spot you include the qualified expenses I am not seeing somewhere?

1099-Q causes more IRS CP2000 than I have seen in many years.

This is the general rule:

The 1099-Q will be in the name of the account holder or the beneficiary. Received from the 529 plan or administrator of the education IRA.

If your qualified education expenses are equal to the distribution, your earnings will not be taxable. As long as your distribution was spent entirely for education expenses.

If the expenses exceed the distribution amount, the difference can be claimed as an education credit or tuition and fees adjustment.

If the distribution exceeded the qualified expenses, then part of the earnings will be taxable. The entire distribution will not be subject to tax, but a portion of the earnings may be.

Review Publication 970 to figure the taxable amount.

[Lion EA]

But, Taxed, the OP asked where/how do you report the 1099-Q amount and the expenses to show it will not be taxed? And, how do you respond to the letter asking for tax and penalty?

[Guest Taxed]

At this point since IRS is looking for an explanation, I would send them a copy of the 1098-T and explanation that the qualified education expenses (list them) equaled or exceeded the distribution.

Without knowing what other ed credits the tax payer took, I suggested pub 970 as you know you can't double dip.

[jshtax]

At this point since IRS is looking for an explanation, I would send them a copy of the 1098-T and explanation that the qualified education expenses (list them) equaled or exceeded the distribution.

Without knowing what other ed credits the tax payer took, I suggested pub 970 as you know you can't double dip.

I am having them send the supporting doc's from school. I just want to know going forward how to avoid this. The 1040 only shows how to report if not used for qualified expenses but nowhere does it allow you to report the use of the gains were for qualified purposes. Of course the gov't will assume its not for educational/qualified purposes just like they do when a stock sale is not reported.

[jshtax]

I am having them send the supporting doc's from school. I just want to know going forward how to avoid this. The 1040 only shows how to report if not used for qualified expenses but nowhere does it allow you to report the use of the gains were for qualified purposes. Of course the gov't will assume its not for educational/qualified purposes just like they do when a stock sale is not reported.

This is out of state tuition so the $6000 of taxable distribution is a fraction of the full tuition.

[Mr. Pencil]

A client received a letter asking for tax and penalty and all funds were used for college for his kids so the gain was not reported under other income. Is there a spot you include the qualified expenses I am not seeing somewhere?

This is another example of how IRS could save everyone a lot of trouble by providing a way to report the non-taxable amount up front. On the other hand, that would probably be considered unnecessary paperwork for something that isn't even taxable. People complain about the IRS no matter what they do.

Anyway, you should treat this as an audit. Because it is. Follow instructions in the letter EXACTLY, including using the official reply form. If you need more time, send in the reply with ONE sentence stating when you expect to respond. You don't need to give a reason, just don't take more than 30 days.

You probably assumed some things or accepted the client's words when you prepared the return. Lay out ALL the math details now, according to Pub 970. Adjust qualified education expenses and co-ordinate with American Opportunity Credit and so on. Keep it all on a single page, but attach full documentation. That means invoices as well as receipts. If you need to count supplies that can't be proved, have the taxpayer sign a short summary.

[Guest Taxed]

I was just going to say the same thing. If you look at the instructions, on line 21 form 1040 you include the income only if taxable. Form 5329 part II says report ONLY if included in line 21. So basically they left a gap because none of the forms allow a place to show the distribution and expense to cancel any taxable income.

I suppose one could include it in part II of 5329 and offset it right below showing 0 taxable income and 0 additional tax. But then you may get another CP2000 on the 5329??

[Lion EA]

I read the Pub. Just getting worried if letters are going out now. Had my first 1099-Q for 2012 and lots of tuition (CT school so pricey) and therefore not taxable. She's the thoughtful kind of client (husband was a tax preparer) who won't call me until 16 October.

How did all of you report? And, who has gotten letters?

[Guest Taxed]

I am trying to remember if I did a 1099-Q this season?? I know I did a bunch of AOC.

Last year I had one CP2000 and years before a few. In all cases I just call IRS and fax them the 1098-T and a list of qualified expenses signed by taxpayer. They did not request any receipt sand usually the 1098-T amount is so large that it becomes sort of moot.

But I think what is happening is that the same taxpayers may be claiming full AOC, and IRS wants to see if you did the worksheet of pub 970 (no double dipping).

[jshtax]

I read the Pub. Just getting worried if letters are going out now. Had my first 1099-Q for 2012 and lots of tuition (CT school so pricey) and therefore not taxable. She's the thoughtful kind of client (husband was a tax preparer) who won't call me until 16 October.

How did all of you report? And, who has gotten letters?

The problem with this is we are just now getting to the point in time where people are using these funds so it will become more of an issue.

[Guest Taxed]

The problem with this is we are just now getting to the point in time where people are using these funds so it will become more of an issue.

Consider yourself fore warned if you are doing a lot of them until IRS changes how it is reported on the return.

As you may know IRS is looking more closely at education credits especially AOC.

[jshtax]

Consider yourself fore warned if you are doing a lot of them until IRS changes how it is reported on the return.

As you may know IRS is looking more closely at education credits especially AOC.

I know....I have 1 this year that might get kicked out they couldnt find their return from 4 years ago so we winged it. If disallowed they at least get Hope.

[SaraEA]

I have had many audits of 509 distributions in the past couple of years, even where the taxpayers made too much to claim any education credits or adjustments, so yes, it has become a hot topic. I think the underlying issue is that the IRS knows that the forms 1098T are useless (been to several seminars where IRS presenters said exactly that). And the 509s can cover many things like room and board and books that don't appear on the T. The IRS computers just can't match anything so the agency is reverting to the old fashioned way of requesting paper proof.

You DO have to enter amounts in the program. It's under "qualifying education expenses," which is what's left after taking advantage of any education credits or adjustments. That's the number the IRS is auditing. Another situation the computers can't understand is when a student is in their senior year and final semester tuition was paid in December. They were a full-time student in the spring semester, and 509 distributions paid for their room and board, etc., but the computer doesn't see them as a student because there is no T.

[Guest Taxed]

If the 1098-T is useless in its current form, why don't they look at changing the input form for Education expenses that will give them sufficient details and avoid a CP2000. I mean we do this after receiving the CP2000, so let's be proactive and solve this problem.

[Cathy]

I read the Pub. Just getting worried if letters are going out now. Had my first 1099-Q for 2012 and lots of tuition (CT school so pricey) and therefore not taxable. She's the thoughtful kind of client (husband was a tax preparer) who won't call me until 16 October.

How did all of you report? And, who has gotten letters?

I've had just one 1099-Q and my client also received a letter from IRS. Part of the distribution was taxable as the education credit produced a greater refund. So it appears that possibly all of the returns with a 1099-Q will get a letter unless 100% of the distribution is taxable.

Mr. Pencil's reply was 100% correct. If anyone gets the letter, respond to it exactly as he stated.

If I have another 1099-Q in the future, I will file a paper return showing the formula used to compute the taxable amount and will also attach a copy of each receipt. Trying to get all of the receipts together after a couple of years have gone by was hard for my client who was disorganized while attending school while raising a family, The distribution was large, however, with being able to use r&b even while living at home (plus other incidental items) allowed the client to be taxed on a relatively small amount.

[Guest Taxed]

I don't think they will read any attachments with a paper return unless it is already something that they are looking for (like adoption expenses as an example). So at the end we may be at the same place had we e-filed. Just have to warn our clients about the CP2000 and make sure they keep good documentation of qualified expenses for 529 plans that are much broader than AOC for example.

When my son was in college all expenses were paid by check or credit card, no matter if it was a $10 bill at the bookstore. I think these days most students have debit cards so it should be relatively easy to keep track of expenses.

[SaraEA]

"I think these days most students have debit cards so it should be relatively easy to keep track of expenses." That is the source of the problem! Even the 1098Ts are sent to the students, usually electronically. Lots of Moms and Dads sit at my desk texting their kids to get that document to them ASAP. And debit card purchases at the college bookstore don't count for much. The bookstores sell sweatshirts, itunes cards, coffee, you name it. You need an itemized receipt, something the students will almost never be able to produce. Better for them to buy their books online where you can actually print out the order proving you bought books and not a milkshake.

I have a client right now with three kids in college who just won a no change audit for 2009 over 529 distributions. Now that he knows the kind of documentation required he's already gathering it for anticipated audits of 2010, 2011, and 2012. He makes too much to claim any education credits but had substantial distributions from 529 plans for all three kids each year. When responding to the 2009 audit the IRS wouldn't accept the T. They wanted the print out of the actual expenses, what was paid for what and when. One of the kids lives off campus and he had to get from the school the standard room and board expenses the Dept of Ed uses in its calculations for that school. Not one kid could produce receipts for books.

The T does have it issues, starting from its very first year when colleges had to issue it but didn't have to fill in any boxes. Remember that? Now there is a box for "amount billed" and another for "amount paid." What is the point? I also see a lot of adjustments for last year in the box provided. Financial aid often doesn't come through until January so that messes up last year's numbers. At least this year we can enter into the program that some of the billing was for the next year's tuition, so the IRS gets notice that the kid is a student the following year even if no T is issued. There has to be a better way.

[Randall]

As for reporting, I put the earnings amount from the 1099-Q on line 21. ATX input has a line for it. I then put a negative number on a fill in line for the nontaxable amount with a description such as '1099-Q amount used for qualified education'. IRS may still audit this, but at least the 1099-Q is accounted for in the return processing.

[Guest Taxed]

So just to clarify, does the line #21 on the printed form show a positive amount or blank?

[jshtax]

You could always put it there then use the adjustment section below.

[Guest Taxed]

I would really like to ask that question on some other tax forums and see what others are doing??

Obviously IRS is of no help on that one.

[jklcpa]

As for reporting, I put the earnings amount from the 1099-Q on line 21. ATX input has a line for it. I then put a negative number on a fill in line for the nontaxable amount with a description such as '1099-Q amount used for qualified education'. IRS may still audit this, but at least the 1099-Q is accounted for in the return processing.

Not a bad idea if you are paper filing the return, but then you might as well attach a proper worksheet that shows the allocation with the fraction used to calculate any taxable portion after the nontaxable portion is accounted for. The problem with using the ATX worksheet, or any worksheet for that matter, is that those aren't transmitted with an e-filed return. We should make sure to get the documentation for our files that will be needed and prepare a worksheet that could be easily photocopied for when the IRS notice is sent.

I would really like to ask that question on some other tax forums and see what others are doing??

The same question was posted on the official forum and I believe there weren't any responses last time I was over there.

[kcjenkins]

So just to clarify, does the line #21 on the printed form show a positive amount or blank?

Could be either, depending on whether it was all used for 'qualified' expenses. Plus whether there is any other Line 21 item.