529 distributions are supposed to be tax free, so why did my refund just drop by $2000 after entering the information from my 1099-Q?

[archi-dad]

All of the distribution was used for qualified education expenses.

[KrisD15]

When you enter the 1099-Q, you need to go through the step-by-step interview and tell the TurboTax program that the funds were used for education. 

[archi-dad]

Thanks, but I'm pretty sure I had done that when going through the entire set of questions. I remember answering questions about education expenses. But then I received the 1099-Q in the mail, got back onto Turbotax's website, did a search for where I should enter 1099-Q information and found it. So I then went through that set of questions and filled it out with the form's info. That's when the refund dropped. Is it possible that the data is somehow entered twice now?

[KrisD15]

Yes, sounds that way. If you first reported the amount form the 1099-Q in the education section WITHOUT the 1099-Q and then entered the 1099-Q, the program would double it. 

If you reported the distribution correctly in the Education Section without using the 1099Q, you may delete the 1099-Q 

The 1099-Q is a reporting tax form, but is not attached to a tax return, so it doesn't need to be entered on the 1099-Q screen as long as the program has the numbers to do the calculations. 

OR

You can enter the 1099-Q and then go back through the education interview to adjust the answers and amounts you previously reported. If you choose to do this, PLEASE MAKE SURE you go through the ENTIRE interview and finish with the "Maximize My Tax Break" screen. 

[archi-dad]

Thanks. I tried deleting the 1099-Q and going through the interview again, but I don't see the questions that asked for figures. So I re-added the 1099-Q, the refund dropped like the first time, then went through the interview and the part where it maximizes the tax break. It still showed that I would get the $2500 American Opportunity Tax Credit, and the refund still stayed lower than before. So I'm stumped, thinking that when I went through the interview the first time, I must have checked the box that said I had NOT received a 1099-Q, and didn't enter any figures. But I still don't understand how entering the form's figures would reduce the refund since 529 distributions are tax free when used for approved educational purposes. It has me wondering whether I need to somehow just the whole process over again, but I don't know how I'd do that either.

[RayW7]

I agree with the previous answers but 529 plan distributions may be taxed in part.  If someone has contributed money to a 529 plan or a Coverdell Education Savings Account (Coverdell ESA) and designates you as the beneficiary, you will receive an IRS Form 1099-Q when you start tapping into those funds. When you receive the 1099-Q each year, it may be necessary to include some of the amounts it reports on your tax return.

For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.

Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.

[archi-dad]

We didn't receive any grants, just a $1000 private scholarship. Here's my best recounting of what I did on Turbotax and the figures involved:  when I first went through the interview, I think I checked the box saying I had not received a 1099-Q (because I hadn't yet), but did enter the $16,596 in expenses from the school's 1098-T, another $845 in required expenses plus $120 in nonrequired expenses, and the $1000 scholarship (so $17,561 in expenses minus the $1000 scholarship). Then Turbotax went through the calculation to determine that we would get the $2500 AOTC. Later, after receiving the 1099-Q, I entered the data from the form, which included $17,915 in distributions from a 529 account ($10,253 in earnings, and $7,662 as the basis). That is when the projected tax refund dropped almost $2,000. My best guess (after doing some reading in Publication 970) is that the fact that I'm getting the $2,500 AOTC is reducing the amount of 529 distributions that are tax deductible. Is that possible, and does that sound right? If so, it's eye opening to realize that not every single dollar used from a 529 is tax free!

[AmyC]

I don't see any mention of room and board expenses. Could some of that scholarship have gone toward room and board? If some of it went to help with basic living, then the rest of your 1099Q could maybe go towards the college expenses.

If you can get the entire 1099Q to cover the college expenses, you don't even have to enter the form. You just need to be able to show that it can. I am also going to recommend you look at another of my answers for help. 

[archi-dad]

The school included room & board in box 1 of the 1098-T amount of $16,596, so that's already in there. I did, however, remember that I had to get my daughter a computer, and that almost $800 should be considered required because most of her classes were online even though she was on campus. So with that added, along with the tuition, room and board, and the books and supplies I'd already factored in, the total expenses add up to $18,357. If we factor in the private $1000 scholarship (which is not reported on any document I've received, btw - it's a memorial scholarship offered by a family associated with her high school - but I've included it so far anyway), the expenses were $17,357. That's just barely less than the $17,915 distributed from the 529 account. So I don't understand why the refund Turbotax is calculating is nearly $2k less when I include the 1099-Q. Should I just delete it, along with the unreported scholarship, since the expenses add up to more than the 529 distribution and I have records to show that if needed?

Is this maybe how the calculation goes?... Expenses of $18,357 minus $2500 AOTC minus $1000 scholarship equals $14,857, which is $3,058 less than the $17,915 distributed from the 529, leaving the $3,058 as taxable?

[AmyC]

No, that math does not work that way,  Let's back up. The room and board should not be in box 1. That should be completely separate. Please review your bursar's account and verify that it is included. See 1098T instructions

If it is not included, as I suspect, then you have ample money left to pay for room and board. In that case, you can in good conscious, delete the Q.

Double check on that and then we can move forward again. Thanks!

[archi-dad]

Thanks for the help you're providing! I know for certain, though, that the 1098-T we received from the school does include room & board. I can see in the account details on the school's website that, in 2020, we paid $10,694 for fall '20 tuition and fees, $1,751 for fall '20 room and board (it would have been higher but our daughter moved back home after a month due to the pandemic), and $4,151 for spring '21 tuition and fees, for a total of $16,596. This is the exact same amount included in box 1 of the 1098-T. I can see that the instructions for the 1098-T say that the school should not have included room and board, but they clearly did. Where does this leave us? And thanks again!

[ThomasM125]

You can deduct room and board from the income reported on form 1099-Q. 

The best way to do this in TurboTax is to enter the 1099-Q form first. Then, enter your form 1098-T form and you will see an option in that section to enter your room and board expenses and they will be used to reduce your education plan income.

If you enter the form 1098-T first, you may not see the option to enter you room and board expenses.

[archi-dad]

Thanks, but what you've said confuses me. What do you mean when saying that I can deduct room and board from the 1099-Q? That form reports the amount of distributions from my 529, not how much was taken for tuition versus r&b. But maybe you didn't mean it the way I read that? To follow your process suggestion, though, is also confusing - I've already entered figures from both the 1099-Q and 1098-T. Am I able to delete the data for both forms I've entered into Turbotax, and then follow the steps you suggest? Thank you again.

[ReneeM7122]

If your Distribution did not exceed your Qualified Education Expenses then you don't have to enter the information from 1099-Q at all.  But if it did, read on for an explanation about what might trigger taxability after entering the 1099-Q.

For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well. Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000.

Box 1 of your 1099-Q will report the total distribution from your education program for the year, regardless of whether the funds are sent directly to the school. Box 2 reports the portion of the distribution that represents account earnings, while Box 3 reports the portion representing the original contribution to the account. In other words, the amount reported in Box 3 must equal Box 1 minus Box 2.

In some cases, your 1099-Q may include the fair market value of the account. Boxes 4 through 6 provide additional information, but they have no impact on whether some of your distributions are reportable on a tax return.

Enter your 1099-Q first, then enter all Education Expenses, including books and room and board, if applicable.  

Here is a TurboTax article that discusses the 1099-Q.

[archi-dad]

Thanks. We incurred $16,596 in expenses for tuition and r&b (confirmed by the school's 1098-T), another $964 in required books and supplies, and $787 for a required laptop, for a total of $18,347. The distribution from the 529 account (confirmed by the 1099-Q) was $17,915. That's less than the total expenses. So I can delete the 1099-Q on Turbotax?