Turbo Tax showing 529 distribution as taxable income

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RetiredCSProf
Posts: 296
Joined: Tue Feb 28, 2017 4:59 pm

Turbo Tax showing 529 distribution as taxable income

Post by RetiredCSProf » Wed Feb 06, 2019 5:43 pm

There's a documented "bug" in TT:

I'm working on my taxes and was surprised to see qualified educational distributions from my son's Vanguard 529 plan show up as taxable income. Apparently, this happens because TT's Education Optimizer does not support distributions reported on a 1099-Q form. And is likely to occur if the taxpayer has an income that is too high to qualify for American Opportunity or Lifetime Learning Credit (max income for these credits is lower for singles than for MFJ).

Here's the fix:
https://ttlc.intuit.com/questions/44517 ... er_6918835

I just tried it and it worked. Somehow, TT entered a default $10,000 as "amount used to calculate education deduction/credit"

marcopolo
Posts: 2499
Joined: Sat Dec 03, 2016 10:22 am

Re: Turbo Tax showing 529 distribution as taxable income

Post by marcopolo » Wed Feb 06, 2019 6:21 pm

Did you withdraw too much from the 529 such that you don't enough QHEE to cover all the withdrawals?
If that is not the case, i don't think there is any need to complicate your taxes by including the info from 1099Q and 1098T.
I believe you only need to do that if there is a taxable amount you need to report.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Topic Author
RetiredCSProf
Posts: 296
Joined: Tue Feb 28, 2017 4:59 pm

Re: Turbo Tax showing 529 distribution as taxable income

Post by RetiredCSProf » Wed Feb 06, 2019 6:43 pm

There is a bug in the TT software. My MAGI is too high (>$90K) to take the American Opportunity or Lifetime Learning Credit. TT software assumes that I will want to take these credits, even though I am ineligible, and subtracts $10K from my eligible QHEE. My son will likely still be in college when he turns 24 -- so maybe he can take those credits then.

No, I did not withdraw too much. The difference between my withdrawals on 1099-Qs and QHEE on 1098-Ts is about $400, which covers books and supplies.

Yes. The IRS requires that withdrawals from 529 plans and ESAs be reported on income tax returns. It is not an option.

I thought it would be helpful to others to alert them of this issue. I spent two hours re-checking my inputs to Online TT this morning before I realized the problem. The extra income was pushing me into the next IRMAA bracket for Medicare premiums.

marcopolo
Posts: 2499
Joined: Sat Dec 03, 2016 10:22 am

Re: Turbo Tax showing 529 distribution as taxable income

Post by marcopolo » Wed Feb 06, 2019 7:39 pm

RetiredCSProf wrote:
Wed Feb 06, 2019 6:43 pm

Yes. The IRS requires that withdrawals from 529 plans and ESAs be reported on income tax returns. It is not an option.
I am not familiar with ESAs, but the above statement is incorrect for 529 plans.
I am just trying to save you, and others that might read this, a lot of unnecessary paperwork.

From pub 970:
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 (defined under Figuring the Taxable Portion of a Distribution, later).

Any such income (withdrawal beyond QHEE) would be reported on line 21 (Other Income). From the instructions for that line (emphasis mine):

• Taxable distributions from a Coverdell education savings account (ESA)
or a qualified tuition program (QTP).
Distributions from these accounts may
be taxable if (a) in the case of distributions from a QTP, they are more than
the qualified higher education expenses
of the designated beneficiary in 2018 or,
in the case of distributions from an ESA,
they are more than the qualified education expenses of the designated beneficiary in 2018, and (b) they were not included in a qualified rollover. Nontaxable distributions from these accounts
don’t have to be reported on Form 1040.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Topic Author
RetiredCSProf
Posts: 296
Joined: Tue Feb 28, 2017 4:59 pm

Re: Turbo Tax showing 529 distribution as taxable income

Post by RetiredCSProf » Wed Feb 06, 2019 8:31 pm

Thanks! I see that now. I thought I was required to enter the information. The TT answer is: the taxpayer should enter the information and leave it up to TT to decide if it needs to be reported. Now that I fixed the problem I was having, the numbers show up only on the worksheets.

letsgobobby
Posts: 12080
Joined: Fri Sep 18, 2009 1:10 am

Re: Turbo Tax showing 529 distribution as taxable income

Post by letsgobobby » Wed Feb 06, 2019 8:37 pm

Deleted
Last edited by letsgobobby on Thu Apr 18, 2019 1:57 am, edited 1 time in total.

marcopolo
Posts: 2499
Joined: Sat Dec 03, 2016 10:22 am

Re: Turbo Tax showing 529 distribution as taxable income

Post by marcopolo » Wed Feb 06, 2019 8:55 pm

letsgobobby wrote:
Wed Feb 06, 2019 8:37 pm
marcopolo wrote:
Wed Feb 06, 2019 7:39 pm
RetiredCSProf wrote:
Wed Feb 06, 2019 6:43 pm

Yes. The IRS requires that withdrawals from 529 plans and ESAs be reported on income tax returns. It is not an option.
I am not familiar with ESAs, but the above statement is incorrect for 529 plans.
I am just trying to save you, and others that might read this, a lot of unnecessary paperwork.

From pub 970:
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 (defined under Figuring the Taxable Portion of a Distribution, later).

Any such income (withdrawal beyond QHEE) would be reported on line 21 (Other Income). From the instructions for that line (emphasis mine):

• Taxable distributions from a Coverdell education savings account (ESA)
or a qualified tuition program (QTP).
Distributions from these accounts may
be taxable if (a) in the case of distributions from a QTP, they are more than
the qualified higher education expenses
of the designated beneficiary in 2018 or,
in the case of distributions from an ESA,
they are more than the qualified education expenses of the designated beneficiary in 2018, and (b) they were not included in a qualified rollover. Nontaxable distributions from these accounts
don’t have to be reported on Form 1040.
Do transfers to another 529 have to be reported?
Only withdrawals that result in some taxable income need to be reported. A simple transfer from one plan to another would not produce any taxable income, to the best of my knowledge.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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