Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

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stuper1
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Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 3:01 pm

Ok, thanks to the good people here I realized today that I made a mistake when filing my 2018 taxes and claiming the American Opportunity Tax Credit for college expenses for my son paid from a 529 plan. I thought dollars paid with 529 basis-money (versus earnings-money) could be used for the AOTC, but apparently I am wrong. For purposes of discussion, let's say the total 529 withdrawal was $6,000 of which $4,000 was basis-money (which I used to claim the $2,500 AOTC) and $2,000 was earnings-money.

So, how can I fix this mistake? I filed using taxhawk if that makes any difference.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 3:26 pm

You'll need to file an amended tax return and either reduce/eliminate the AOTC claim, and/or declare as taxable otherwise tax-advantaged funds so that there is no double dipping with the AOTC. Run the numbers different ways and see what works out to be the most advantageous.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by bloom2708 » Thu Feb 21, 2019 3:29 pm

Are you sure you (tax software) did it wrong?

Was $6,000 the total/only amount you paid for qualified education expenses? Payments were only made with 529 money?

I am using Taxact.com online version. It walks you through step by step. 1098-T, 1099-Q, other Qualified education expenses, it summarizes everything multiple times as you step through.
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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 3:34 pm

DIFAR31 wrote:
Thu Feb 21, 2019 3:26 pm
You'll need to file an amended tax return and either reduce/eliminate the AOTC claim, and/or declare as taxable otherwise tax-advantaged funds so that there is no double dipping with the AOTC. Run the numbers different ways and see what works out to be the most advantageous.
For the second scenario you mention of declaring as taxable otherwise tax-advantaged funds and using my assumed amounts of $4,000 in basis-money and $2,000 in earnings-money, which aren't too far off of the actual amounts, would I be declaring an additional $6,000 as taxable income or just the $2,000 in earnings-money?

I'm in the 22% tax bracket, so $6,000 more income would generate $1,320 in additional taxes, and $2,000 income would generate $440. Either of those is less than the $2,500 tax credit, so I can't see that I would want to eliminate the AOTC claim.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 3:35 pm

Yes, first take a big-picture look at what the expenses were and how and when they were paid. If AOTC qualified expenses paid in 2018 (tuition, certain required fees, required book and supplies) totaled $20k, for instance, with $6k of that paid with 529 funds and the balance paid out of pocket (and this includes loans), then there is nothing to fix.

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 3:36 pm

bloom2708 wrote:
Thu Feb 21, 2019 3:29 pm
Are you sure you (tax software) did it wrong?

Was $6,000 the total/only amount you paid for qualified education expenses? Payments were only made with 529 money?

I am using Taxact.com online version. It walks you through step by step. 1098-T, 1099-Q, other Qualified education expenses, it summarizes everything multiple times as you step through.
Well I know that all the money used for my son's education came from the 529 plan, and I got a $2,500 tax credit, so I'm pretty sure that I input something wrong somewhere.

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 3:37 pm

He goes to a state school, lives at home, and was only there for fall semester. His total education expenses last year were only about $6,000.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 3:40 pm

stuper1 wrote:
Thu Feb 21, 2019 3:34 pm
For the second scenario you mention of declaring as taxable otherwise tax-advantaged funds and using my assumed amounts of $4,000 in basis-money and $2,000 in earnings-money, which aren't too far off of the actual amounts, would I be declaring an additional $6,000 as taxable income or just the $2,000 in earnings-money?

I'm in the 22% tax bracket, so $6,000 more income would generate $1,320 in additional taxes, and $2,000 income would generate $440. Either of those is less than the $2,500 tax credit, so I can't see that I would want to eliminate the AOTC claim.
Only the $2k in earnings would be taxable; you've already paid tax on the $4k contribution amount. As you have learned, 529 distributions are always made on a pro-rata basis; you can not take a distribution that is only contributions. Because you would be declaring the earnings of part or all of the 529 distribution as taxable so that the AOTC can be claimed, you would be covered under one of the exceptions to paying the 10% additional tax ("penalty").

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 3:49 pm

Does it sound then as though my tax bill should go up by about $440? I just want to have a sanity check at the end. I have a feeling this is going to get complicated when I start trying to figure out which tax forms to change/add.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 4:02 pm

stuper1 wrote:
Thu Feb 21, 2019 3:49 pm
Does it sound then as though my tax bill should go up by about $440? I just want to have a sanity check at the end. I have a feeling this is going to get complicated when I start trying to figure out which tax forms to change/add.
If there are no other changes, an additional $2k taxed as ordinary income with a marginal rate of 22% = $440 more tax to pay.

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 4:04 pm

Thank you all very much for your help.

I understand that you are not tax attorneys, so any problems are my own responsibility.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 4:34 pm

Let's see if I can milk any more information out of anybody who may know the answers off hand.

To correct my mistake, do I just add the earnings-money from my 529 withdrawals to line 21 of schedule 1, which rolls up into line 22 and then to line 6 of Form 1040? Is that all I have to do? Or are there any other forms/schedules involved that I need to change or add?

livesoft
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by livesoft » Thu Feb 21, 2019 4:42 pm

stuper1 wrote:
Thu Feb 21, 2019 4:34 pm
Let's see if I can milk any more information out of anybody who may know the answers off hand.

To correct my mistake, do I just add the earnings-money from my 529 withdrawals to line 21 of schedule 1, which rolls up into line 22 and then to line 6 of Form 1040? Is that all I have to do? Or are there any other forms/schedules involved that I need to change or add?
I don't think so.

Presumably, you will put $4,000 of 529 plan withdrawal somewhere. That $4,000 was applied to your AOTC calculation. The changed 529 plan withdrawal of $4,000 goes somewhere. Some of the withdrawal is return-of-capital. Some is apparently taxed gains.

So did you read IRS Publication 970 about QTP withdrawals carefully? Apparently, there is
IRS Pub 970 p. 53 wrote:Coordination With American Opportunity
and Lifetime Learning Credits
that you need to be aware of. Note the careful wording in the Pub 970 and do NOT confuse "Sara's parents" with "Sara" because they report income and taxes on two different tax returns.
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DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 4:51 pm

stuper1 wrote:
Thu Feb 21, 2019 4:34 pm
To correct my mistake, do I just add the earnings-money from my 529 withdrawals to line 21 of schedule 1, which rolls up into line 22 and then to line 6 of Form 1040?
If you want $4k of the 529 distribution to be declared a non-qualified distribution so that the full AOTC can be claimed, you need to figure the earnings portion of that part of the distribution on a pro-rata basis so that the appropriate amount of earnings can be taxed. That amount will then be reported on line 21 of Schedule 1.

Is that all I have to do? Or are there any other forms/schedules involved that I need to change or add?
You also need to complete Part II of Form 5329 and submit the form to show that the 10% additional tax ("penalty") is not owed for the non-qualified part of the 529 distribution.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by marcopolo » Thu Feb 21, 2019 4:54 pm

stuper1 wrote:
Thu Feb 21, 2019 4:34 pm
Let's see if I can milk any more information out of anybody who may know the answers off hand.

To correct my mistake, do I just add the earnings-money from my 529 withdrawals to line 21 of schedule 1, which rolls up into line 22 and then to line 6 of Form 1040? Is that all I have to do? Or are there any other forms/schedules involved that I need to change or add?
Not quite that simple.

Unless you have some exemption (scholarship, military academy, etc), the earnings portion of the non-qualified withdrawals will also be subject to a 10% penalty (10% of the attributed earnings). The taxable earnings get reported on line 21. The penalty is computed on form 5329 (part 2), and reported on line 59 on schedule 4.

Good luck
Once in a while you get shown the light, in the strangest of places if you look at it right.

livesoft
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by livesoft » Thu Feb 21, 2019 4:58 pm

^There should not be a penalty. See the publication I referenced.
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DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 4:59 pm

marcopolo wrote:
Thu Feb 21, 2019 4:54 pm
Not quite that simple.

Unless you have some exemption (scholarship, military academy, etc), the earnings portion of the non-qualified withdrawals will also be subject to a 10% penalty (10% of the attributed earnings). The taxable earnings get reported on line 21. The penalty is computed on form 5329 (part 2), and reported on line 59 on schedule 4.

Good luck
Declaring all or part of a 529 distribution as non-qualified in order to claim the AOTC is an allowable exception to paying the 10% additional tax ("penalty") on the earnings portion of a non-qualified 529 distribution. See IRS pub 970, pg. 54, exception #5.

https://www.irs.gov/pub/irs-pdf/p970.pdf

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by marcopolo » Thu Feb 21, 2019 5:05 pm

DIFAR31 wrote:
Thu Feb 21, 2019 4:59 pm
marcopolo wrote:
Thu Feb 21, 2019 4:54 pm
Not quite that simple.

Unless you have some exemption (scholarship, military academy, etc), the earnings portion of the non-qualified withdrawals will also be subject to a 10% penalty (10% of the attributed earnings). The taxable earnings get reported on line 21. The penalty is computed on form 5329 (part 2), and reported on line 59 on schedule 4.

Good luck
Declaring all or part of a 529 distribution as non-qualified in order to claim the AOTC is an allowable exception to paying the 10% additional tax ("penalty") on the earnings portion of a non-qualified 529 distribution. See IRS pub 970, pg. 54, exception #5.

https://www.irs.gov/pub/irs-pdf/p970.pdf
Well, I did say, unless an exception applies. :oops:

Thanks.
I stand corrected, I did not realize that was an allowed exception to the penalty, not having been eligible for the aotc in the past, but planning to use it for 2019.

Seems then, the OP just needs to include the taxable earnings on line 21.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 5:24 pm

marcopolo wrote:
Thu Feb 21, 2019 5:05 pm
Well, I did say, unless an exception applies. :oops:

Thanks.
I stand corrected, I did not realize that was an allowed exception to the penalty, not having been eligible for the aotc in the past, but planning to use it for 2019.

Seems then, the OP just needs to include the taxable earnings on line 21.
Part II of Form 5329 should still be completed, to show that the additional tax amount is $0.

markcoop
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by markcoop » Thu Feb 21, 2019 7:28 pm

There is another option. A kid's typical 4-year college education lasts 5 tax years. You could simply file an am-mended return to not use the AOTC for 2018. Instead, you can use it for the next 4 years, 2019-2022. That way you won't be penalized at all (assuming you use up all the money in your 529 and still have enough room for $4k/year out of pocket.
Mark

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 7:32 pm

I think I figured out that my additional tax is a bit less than $440.

Based on the formula on p. 53 of pub. 970, my tax-free earnings are roughly:

$2,000 x ($6,000 - $4,000) / $6,000 = $667

My taxable earnings are:

$2,000 - $667 = $1,333 which is lower than the $2,000 I thought originally, so my extra taxes are only $293, rather than $440.

Does anybody see any flaws here?

By the way, my example may be a bit confusing because just by accident my withdrawn 529 earnings are $2,000, which is exactly equal to the difference between my son's qualified expenses and the $4,000 used to qualify for the AOTC.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by livesoft » Thu Feb 21, 2019 7:38 pm

stuper1 wrote:
Thu Feb 21, 2019 7:32 pm
Does anybody see any flaws here?
Isn't your student supposed to put that income on their own tax return and not on your return? Maybe they won't have to pay any taxes on that amount at all?
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 7:51 pm

Oh boy, you had to throw another wrench into the works, didn't you?

Actually I'm glad you brought that up. We got two 1099-Q forms from our 529 plan. One of them is addressed to me, and one is addressed to my son. I think the one to my son is for the tuition payments that were paid directly to the university. The one to me is for books and some other tuition payments that I paid and then reimbursed myself from the 529 plan. I don't understand why we got one addressed to me and one to my son. The earnings on my son's form are less than $1,050, and I read that if a dependent had unearned income of less than $1,050 then he doesn't need to file a tax return. He had no other income.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 7:53 pm

livesoft wrote:
Thu Feb 21, 2019 7:38 pm
Isn't your student supposed to put that income on their own tax return and not on your return? Maybe they won't have to pay any taxes on that amount at all?
It depends on where/to whom the 529 administrator sends the distribution. A distribution paid to the beneficiary or the school is reported on the 1099-Q under the beneficiary's name and SSN. A distribution paid to the account owner is reported on the 1099-Q under the account owner's name and SSN. This is the main reason why deciding to whom the 529 distribution is made payable can have different tax consequences.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 8:00 pm

stuper1 wrote:
Thu Feb 21, 2019 7:51 pm
The earnings on my son's form are less than $1,050, and I read that if a dependent had unearned income of less than $1,050 then he doesn't need to file a tax return. He had no other income.
Generally speaking, this is correct. A single filer who is claimed as a dependent on someone else's tax return has a standard deduction of the greater of either earned income (which in this case includes taxable scholarships and grants) plus $350 or $1,050, but no more than the regular standard deduction of $12,000.

As noted above, your son (the 529 account beneficiary) had a 1099-Q sent to him under his name and SSN because you had a least one distribution sent directly to the school. If part or all of that distribution is deemed to be non-qualified, the earnings portion is income to your son.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 8:07 pm

Ok, so just to work in round numbers, let's say that $2,400 of the 529 distribution was paid directly to the university and reported on my son's 1099, and $1,600 of that is basis and $800 was earnings.

Now, how does that affect the original calculation of the expenses used to claim the AOTC?

He had $6,000 total in qualified expenses paid from the 529. I was going to use $4,000 of that to claim the AOTC (meanwhile paying some extra taxes because $1,367 is considered taxable earnings). Since he is getting $2,400 on his 1099, does this mean I can only claim $3,600 toward the AOTC?

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 8:13 pm

stuper1 wrote:
Thu Feb 21, 2019 8:07 pm
Ok, so just to work in round numbers, let's say that $2,400 of the 529 distribution was paid directly to the university and reported on my son's 1099, and $1,600 of that is basis and $800 was earnings.

Now, how does that affect the original calculation of the expenses used to claim the AOTC?

He had $6,000 total in qualified expenses paid from the 529. I was going to use $4,000 of that to claim the AOTC (meanwhile paying some extra taxes because $1,367 is considered taxable earnings). Since he is getting $2,400 on his 1099, does this mean I can only claim $3,600 toward the AOTC?
No; qualified education expenses paid by your tax dependent or by a third party for your tax dependent are considered to be paid by you for purposes of you claiming the AOTC.

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 8:24 pm

Ok, now comes the hard part I suspect. Since part of the 529 distribution was reported on a 1099 to my son, does that change the calculation about taxable earnings used for the AOTC?

The numbers used in the formula are 529 earnings, qualified expenses minus expenses used for AOTC, and total 529 distribution. For my taxes, do I only use the numbers on my 1099 (and not my son's) in the formula? Maybe this is where things get sticky. The earnings and distribution on my form are $1,200 and $3,600. For qualified expenses, do I have to subtract the qualified expenses that were paid directly to the university and reported on my son's 1099? That would mean my qualified expenses are $6,000 - $2,400 (paid direct to university) - $4,000 (used for AOTC) which is a negative $400.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Thu Feb 21, 2019 8:37 pm

stuper1 wrote:
Thu Feb 21, 2019 8:24 pm
Ok, now comes the hard part I suspect. Since part of the 529 distribution was reported on a 1099 to my son, does that change the calculation about taxable earnings used for the AOTC?

The numbers used in the formula are 529 earnings, qualified expenses minus expenses used for AOTC, and total 529 distribution. For my taxes, do I only use the numbers on my 1099 (and not my son's) in the formula? Maybe this is where things get sticky. The earnings and distribution on my form are $1,200 and $3,600. For qualified expenses, do I have to subtract the qualified expenses that were paid directly to the university and reported on my son's 1099? That would mean my qualified expenses are $6,000 - $2,400 (paid direct to university) - $4,000 (used for AOTC) which is a negative $400.
I'm afraid that you have reached the limit of my knowledge. When the 529 distributions were issued in the names of two different taxpayers in the same tax year and one of those taxpayers wants to deem all or part of distributions to multiple taxpayers as non-qualified in order to claim all or part of the AOTC, I don't know how that nut is cracked. My hunch is that for the purpose of claiming the AOTC by way of deeming certain 529 distributions as non-qualified you simply operate as if it doesn't matter to whom the distributions were paid. Obviously for determining the tax liabilities for those non-qualified distributions, you need to assign the taxable earnings based on what information is reported on the 1099-Q forms (recipient's name/SSN/dollar amounts).

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Thu Feb 21, 2019 8:42 pm

I think I'll just pay 22% tax on my $1,200 earnings and call it good. If they want more, they'll tell me.

In 2019, I won't use 529 money for expenses that will be used for the AOTC.

momvesting
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by momvesting » Thu Feb 21, 2019 9:57 pm

Keep in mind that you can use the AOC for 4 years but often college spans 5 tax years. If he has 7 semesters left and no plans of being done early, you may want to forgo the AOC so that you just paid 100% of his tuition from a 529. For the 529 this is a qualified event, so no taxes are due but you will need to file an amended return and not claim the AOC. Then you still have 4 years of eligibility for the AOC and you know going forward to pay that separately out of pocket and then fund the rest with his 529.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by richkorn » Fri Feb 22, 2019 11:40 am

livesoft wrote:
Thu Feb 21, 2019 4:42 pm
stuper1 wrote:
Thu Feb 21, 2019 4:34 pm
Let's see if I can milk any more information out of anybody who may know the answers off hand.

To correct my mistake, do I just add the earnings-money from my 529 withdrawals to line 21 of schedule 1, which rolls up into line 22 and then to line 6 of Form 1040? Is that all I have to do? Or are there any other forms/schedules involved that I need to change or add?
I don't think so.

Presumably, you will put $4,000 of 529 plan withdrawal somewhere. That $4,000 was applied to your AOTC calculation. The changed 529 plan withdrawal of $4,000 goes somewhere. Some of the withdrawal is return-of-capital. Some is apparently taxed gains.

So did you read IRS Publication 970 about QTP withdrawals carefully? Apparently, there is
IRS Pub 970 p. 53 wrote:Coordination With American Opportunity
and Lifetime Learning Credits
that you need to be aware of. Note the careful wording in the Pub 970 and do NOT confuse "Sara's parents" with "Sara" because they report income and taxes on two different tax returns.
To understand more -- in Example 2 claiming the AOTC, who's filing these taxes, Sarah or her Parents? It looks like Sarah?

IF it was the parents tax return because Sarah is a dependent and all education tax credits are being claimed on the parents tax return and the 1099-Q went to the parents, is it still the same calculation in example 2 page 53 for the parents?

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Fri Feb 22, 2019 11:47 am

Does anybody know the answer to richkorn's question directly above? I also wondered about that.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Fri Feb 22, 2019 12:17 pm

stuper1 wrote:
Fri Feb 22, 2019 11:47 am
Does anybody know the answer to richkorn's question directly above? I also wondered about that.
It looks like example 2 is addressing Sara's tax filing situation ("Sara must include $735 in income (Schedule 1 (Form 1040), line 21"), although it refers to Sara's parents claiming the AOTC on their separate return.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Fri Feb 22, 2019 12:18 pm

richkorn wrote:
Fri Feb 22, 2019 11:40 am
IF it was the parents tax return because Sarah is a dependent and all education tax credits are being claimed on the parents tax return and the 1099-Q went to the parents, is it still the same calculation in example 2 page 53 for the parents?
Yes.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Fri Feb 22, 2019 12:24 pm

I concluded yesterday that I need to amend my 1040 (which I filed several weeks ago) so as to pay federal income tax on the 529 earnings for the 529 withdrawal that was used to qualify for the AOTC.

I live in California, which does not tax 529 earnings that are used for qualified education expenses. I'm thinking that I won't owe any additional state tax because I didn't use my 529 withdrawal to qualify for any state tax credits. Does that sound correct? Do I still need to amend my state tax return so that it shows the same AGI as my amended federal return?

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Fri Feb 22, 2019 12:32 pm

stuper1 wrote:
Fri Feb 22, 2019 12:24 pm
I concluded yesterday that I need to amend my 1040 (which I filed several weeks ago) so as to pay federal income tax on the 529 earnings for the 529 withdrawal that was used to qualify for the AOTC.

I live in California, which does not tax 529 earnings that are used for qualified education expenses. I'm thinking that I won't owe any additional state tax because I didn't use my 529 withdrawal to qualify for any state tax credits. Does that sound correct? Do I still need to amend my state tax return so that it shows the same AGI as my amended federal return?
Your federal AGI will change when you amend as described. Does the CA tax return require you to use federal AGI in calculating your state tax? If so, you will likely need to amend your state return as well.

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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Fri Feb 22, 2019 12:37 pm

California starts with the federal AGI but then allows adjustments, so if I file an amended state return I would just end up subtracting out the additional 529 earnings that aren't subject to state taxes.

My question, I guess, is for people who know specific California requirements. Am I required to file an amended California return just to match the federal AGI, even though I won't end up with any difference in state taxes owed?

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Fri Feb 22, 2019 1:06 pm

Here's another question I thought of. If I had had more of the expenses paid directly to the university from the 529, then they would have shown up on my son's 1099-Q rather than mine. Let's say that I had $4,000 of expenses paid that way. The earnings would have been about $1,333. Could I have used that $4,000 to qualify for the AOTC? Then, the $1,333 of earnings would have been taxable to my son? He would have needed to file a tax return, because the $1,333 of non-earned income is greater than the $1,050 limit, but he would not owe any taxes because his total income of $1,333 would be less than his standard deduction. So, if we had done it that way, then neither of us would owe extra taxes even though we used 529 withdrawals to qualify for the AOTC. Does that seem correct? Would doing it this way cause any other changes in taxes that I am unaware of?

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Fri Feb 22, 2019 1:36 pm

stuper1 wrote:
Fri Feb 22, 2019 1:06 pm
Here's another question I thought of. If I had had more of the expenses paid directly to the university from the 529, then they would have shown up on my son's 1099-Q rather than mine. Let's say that I had $4,000 of expenses paid that way. The earnings would have been about $1,333. Could I have used that $4,000 to qualify for the AOTC? Then, the $1,333 of earnings would have been taxable to my son? He would have needed to file a tax return, because the $1,333 of non-earned income is greater than the $1,050 limit, but he would not owe any taxes because his total income of $1,333 would be less than his standard deduction. So, if we had done it that way, then neither of us would owe extra taxes even though we used 529 withdrawals to qualify for the AOTC. Does that seem correct? Would doing it this way cause any other changes in taxes that I am unaware of?
If the $1,333 of taxable 529 earnings is his only income and he is your tax dependent, his deduction would be capped at $1,050 and he would owe tax on $283.

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stuper1
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by stuper1 » Fri Feb 22, 2019 1:44 pm

Hmmm, so he doesn't get the full standard deduction? I didn't know that. What are the conditions where that applies? He's never filed a tax return.

Anyway, he would be in the 10% bracket, so he would only pay $28 in taxes. Whereas, if the $1,333 goes to me, I pay $293 in taxes. It's very interesting how all this stuff interconnects.

marcopolo
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by marcopolo » Fri Feb 22, 2019 1:51 pm

stuper1 wrote:
Fri Feb 22, 2019 1:44 pm
Hmmm, so he doesn't get the full standard deduction? I didn't know that. What are the conditions where that applies? He's never filed a tax return.

Anyway, he would be in the 10% bracket, so he would only pay $28 in taxes. Whereas, if the $1,333 goes to me, I pay $293 in taxes. It's very interesting how all this stuff interconnects.
Dependents only get the standard deduction on earned income. Here are the rules:

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of:

1) $1,050, or

2) The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $12,000).

For that income level, yes, he would only pay at 10%, but the kiddie tax rates ramp up pretty quickly. So, you don't want to end up transferring too much unearned income to him.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DIFAR31
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by DIFAR31 » Fri Feb 22, 2019 3:19 pm

marcopolo wrote:
Fri Feb 22, 2019 1:51 pm
For that income level, yes, he would only pay at 10%, but the kiddie tax rates ramp up pretty quickly. So, you don't want to end up transferring too much unearned income to him.
There has to be more than $2,100 in unearned income (as defined by the kiddie tax rules) before the kiddie tax rates kick in.

HereToLearn
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by HereToLearn » Fri Feb 22, 2019 3:24 pm

I would appreciate any insight readers here can offer to save me from having to correct a mistake.

Here is my somewhat similar scenario.

viewtopic.php?f=2&t=273717&newpost=4396 ... ead#unread

marcopolo
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Re: Fixing a Tax Mistake re 529 Plan Withdrawals and AOTC

Post by marcopolo » Fri Feb 22, 2019 3:37 pm

DIFAR31 wrote:
Fri Feb 22, 2019 3:19 pm
marcopolo wrote:
Fri Feb 22, 2019 1:51 pm
For that income level, yes, he would only pay at 10%, but the kiddie tax rates ramp up pretty quickly. So, you don't want to end up transferring too much unearned income to him.
There has to be more than $2,100 in unearned income (as defined by the kiddie tax rules) before the kiddie tax rates kick in.
Agreed, my point was that beyond that the kiddie rates ramp up very quickly.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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