Tuition, 1099-Q, & Credits

[Lion EA]

Hardly have anyone with 529 Plans, so please let me know if I have this correct. Student received Form 1099-Q, so it gets reported on student's return, right? However, does it get reported at all if used for tuition? Very expensive college. So, nearly $30,000 tuition - $12,000 scholarship - $7,000 529 distribution still leaves lots for parents to claim AOC, yes? If so, does the 1099-Q show up anyplace on student's return? Will the student (or parents) receive an IRS letter?

[Margaret CPA in OH]

I had one, similar situation.  From the Edward Jones form:

Do I need to Report the information on Form 1099-Q? If the fund distributed from a 529 account are used to pay for qualified education expenses, generally the distribution is not subject to tax and does not need to be reported on an income tax return.

What Amount is Potentially Taxable? The contribution basis shown in ox 3 is nontaxable.  This shows the basis in the gross distribution reported in Box 1. The earnings in Box 2 may be subject to taxation.

I will assume that all was used for qualified expenses so you have no reporting.  My clients had too high income to qualify for any other education credits.

I do recall another client in years past that did have to include some amount of the earnings in income.  There is a calculation involved to determine that and it is included in Other income as Qualified tuition program (QTP) distributions and earnings (1099-Q) that would be taxable for nonqualified expenses. I just don't remember now the calculation.

[SaraEA]

We have gotten a lot of IRS letters for clients who had 529 distributions and claimed the AOC. I think it was one of those areas they decided to focus on for a couple of years.  Just keep copies of the reporting docs and a worksheet showing the breakdown of where the money went to prove that you weren't using the same qualified educational expenses for the AOC and tax-free distributions.  This obviously didn't happen in your case, but you never know what the IRS computers were "taught."

[Lion EA]

Thanx, all.

Yep, I already roughed out a spreadsheet for my calculations:

$55,000 tuition - $40,000 grants - $1,700 CHET 529 plan (only $200 potentially taxable) = plenty for AOC. Parents are older (adopted kids from China) and dad now has dementia and can't work, so they will qualify for the AOC. I'm entering in my electronic notes to the parents' tax return, as well as the student's.

Just to add to the complexity, the 1098-Q has the student's name but a SSN that does NOT belong to anyone in the family, totally different digits.

[Max W]

12 hours ago, Lion EA said:

Just to add to the complexity, the 1098-Q has the student's name but a SSN that does NOT belong to anyone in the family, totally different digits.

Correct name, wrong SSN!   Possibly an input error.   One possible scenario - input clerck started on student's info, took a break and flipped over form; came back and saw on screen cursor in SSN field; continued from ther inputting wrong info.   

I discovered something like this when a was the reviewer of CP2000's for HRB .   Employer had issued two different W-2's on the same page.  One had the correct person, the other was for a different employee.   Preparer must have though they were duplicates and carelessly entered the wrong one.  Since the correct one hadn't been reported, it triggered a CP2000.  

[Lion EA]

Today, the mother said the wrong SSN is actually the EIN for Colgate, which might be what happened. However, the 1099-Q has a box to check if the distribution went to anyone other than the beneficiary; so if it went directly to Colgate, that box should be checked -- and is not. Anyway, it is their 529 and they did take a distribution to help with tuition and mom knows an incorrect SSN is listed for her son. We'll know what happened if we get an IRS letter. Just hope some innocent bystander doesn't get a letter for not reporting a 1099-Q distribution!

I have a very small farm in IL that my grandfather bought in the 1880's. I have a sharecropper who also pays me a little bit of cash rent. Each year, he sends me a 1099-MISC with a wrong digit in my SSN. Each year I tell him my correct SSN. Each year is a different error in my SSN. I'm reporting all my income. But, random innocent bystanders are probably getting IRS letters.