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My first 1099Q!


Margaret CPA in OH

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Client has first year college student and 529 plan.  Withdrew $9000, 1098T shows qualified payments of $10,754.  I understood that if using 529 withdrawals, the full amount paid to the university would not be considered for the ed credit.  If so, how does one indicate the offset?  Or am I incorrect (wouldn't be the first time!) and full credit is permitted.  It's clear that the withdrawal is less than the amount paid so no income to report.

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Off the cuff, the 529 plan contributions were never deductible, so I believe as long as the distributions were used for college, we can still take the education credit. I've given a glance to a few sites, and don't see anything counter to this. 

My clients that saved with 529 plans make too much to get the college tuition deduction, so it doesn't really matter in that case. 

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Thanks, Possi.  That's pretty much what I have found, just wondering if there is any way to input the Q data to offset the T data.  If I put in the full 1098T amount but it was paid with $9k from 529 plan, his ed credit is overstated so do I reduce and put in the amount $1754 instead of $10754?  If so, the 1098T won't match.

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Possi is correct, you can't double dip.  Qualified expenses are reduced by tax-free educ assistance and any amount of the expenses used in figuring the education credit to arrive at "adjusted qualified education expenses" (AQEE).  AQEE is then used to determine the amount of taxable distribution from the 529 plan.  Pub 970 has good examples. 

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room and board are qualified expenses for 529 funds but not for the credits

So if you use the 529 for room and board and some of the tuition, you can potentially have $4,000 out of pocket for tuition and books to use for the credit.

Example:  Tuition $10,764 Books $250 = $11,014

Room and Board $2,000

total expenses $13,014

paid with 529 Room and board $2,000 + tuition $,7000= $9,000

out of pocket for AO credit:  $4,014

of course, the $4,000 has to be out of pocket, not paid with tuition or other tax advantage plan

if they don't have enough room and board to "use up" the $2,000, they can choose to pay tax on some of the 529 funds..  Since only the earnings are taxed it would be a small amount.  And if there are scholarships, they can choose to pay tax on the Scholarships to free up the funds for the AO credit.  The Scholarships are taxed to the student not the parent.  Yes, Pub 970 has good examples

 

 

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There is no penalty on the taxable earnings portion of the withdrawal if you had some of the money count toward the AOC.  In other words, you can't use $4k for the AOC AND have the earnings on that $4k be tax-free if the funds came from the 529.  However, since there is a 10% penalty on withdrawals not used for qualified education expenses, you can waive the penalty if the only reason the withdrawal was more than the remaining expenses is that you had to deduct $4k to use for the AOC.

In your client's case, $10,754 qualified ed expenses - $4k for the AOC, leaves the earnings on $6754 eligible for tax-free treatment.  That's 63% of the earnings will be tax-free.  The rest will be subject to tax, but no penalty will apply.  Of course, you can add books and room and board costs to the $6754 and increase that percentage.

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the point is that if the student has an additional $2,246 of qualified expenses, there is enough to have $4,000 for the AO credit and all of the 529 is tax free.

$9,000 for the 529 + $4,000 for the AO credit= $13,000

the student already has $10,754 for tuition.  an additional $2,246 in qualified expenses will free up the $4,000 for the AO credit. Possibly/probably/potentially the student has rrom and board, books, equipment, etc.

BUT if the student lives at home and is not at least a half time student, then no room and board and no AO.  Still the $9,000 is less than the tuition so none is taxable.

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17 hours ago, jklcpa said:

Possi is correct, you can't double dip.  Qualified expenses are reduced by tax-free educ assistance and any amount of the expenses used in figuring the education credit to arrive at "adjusted qualified education expenses" (AQEE).  AQEE is then used to determine the amount of taxable distribution from the 529 plan.  Pub 970 has good examples. 

There is a worksheet for figuring this in Pub 970.  I use it all the time.  It is even better sometimes to add back the amount of the taxable distribution to taxable income to take the credit.

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Jasdim, I cannot find a worksheet in Pub. 970. I did see an example on page 53 which I followed and substituted client numbers.  It appears as though $1167 of the earnings is taxable which makes some sense using $4000 of the expenses for the AOC credit.  However, I cannot understand why, in ATX, of Form 8863 Part III it says No for the student receiving the 1098-T. How could the software figure the credit without the data entered on the 1098-T worksheet?  Also, if $1167 of the earnings are taxable, where is that entered?

Hahn1040, I haven't asked yet about additional expenses but will.  Just in case there aren't any, how and where is the taxable amount entered?

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Goodness!  Ask about other expenses:  Room and Board, books, computer (see page 52 Pub 970)  before you go to the trouble of calculating the taxable portion.

The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses.

If there is a taxable portion, it is reported on line 21 Schedule 1.  Some software have a worksheet to calculate and report. 

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I'll chime in and say to follow what @Hahn1040 is recommending.  I have had great success in the past in claiming a portion of the 529 distribution as taxable income, freeing up the full AOC credit for the parents.  Yes, they pay a tiny bit in tax (only earnings, not basis, are taxable), there's no penalty, and a credit - especially refundable! - beats not claiming income as taxable nine times out of ten.

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Hahn1040, I have asked about other expenses and am awaiting the answer. I did the pencil calculations to better understand what was happening.  It's easier for me to use real numbers than just look at the words.  Just in case there is taxable money, though, I wanted to know where and how to put it.  It's interesting that it would be taxable to the designated beneficiary because I don't see anyone's name on the 1099-Q except "Beneficiary's/Recipient's Name and Address" which is the mother.  Her SSN is also on the form.  Is this a problem?

Sorry for all the questions and confusion.  As mentioned, this is my first in over 20 years of practice (even though these things haven't been around that long - I have).

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