Use caution to not incorrectly pay taxes on 529 distribution in TTax

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fundseeker
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Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by fundseeker » Sun Mar 10, 2019 10:27 am

I want to share this so you do not pay taxes on 529 distributions due to a TurboTax error. TTax allows you to enter any number you want in calculating the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) and for deductions, but then, if you do not qualify for any of those, TTax STILL uses that number to reduce your college expenses, because that amount was applied to a credit or deduction (i.e., reducing your college expenses) for which you did not qualify.

Because of that issue, TTax showed that I was going to be taxed for my 529 distributions, UNTIL I went back in and told TTax to use "0" to look for credits or deductions. That way I was able to apply all of my college expenses against my 529 distributions, and did not get taxed afterall because TTax had reduced my expenses incorrectly.

IMHO, TTax should, after it determines that you do not qualify for any credits or deductions, automatically return to "0" the amount to be considered for credits and deductions.

If I have this wrong, I hope someone will please correct me. But, I recall having this issue last year too.

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leonidas
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by leonidas » Sun Mar 10, 2019 12:01 pm

Good Afternoon!

I am having the same issues but I cant seem to find where to make the changes to fix it. I have a 1098-Q that lists me as the recipient.
Box 1 is 4697, earnings are 1603 and basis is 3094. I found on my fed taxes that the 1603 is taxable. Is this correct?

Topic Author
fundseeker
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by fundseeker » Sun Mar 10, 2019 12:18 pm

The 1063 will be taxable unless you have spent more than that on qualified expenses. The details are in the student information worksheet (SIW), and in the 529 section of that document, it will show how much in expenses it is using in the calculation, and it gets that number from the middle section of the SIW.

markcoop
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Tue Mar 12, 2019 10:38 pm

fundseeker wrote:
Sun Mar 10, 2019 10:27 am
I want to share this so you do not pay taxes on 529 distributions due to a TurboTax error. TTax allows you to enter any number you want in calculating the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) and for deductions, but then, if you do not qualify for any of those, TTax STILL uses that number to reduce your college expenses, because that amount was applied to a credit or deduction (i.e., reducing your college expenses) for which you did not qualify.

Because of that issue, TTax showed that I was going to be taxed for my 529 distributions, UNTIL I went back in and told TTax to use "0" to look for credits or deductions. That way I was able to apply all of my college expenses against my 529 distributions, and did not get taxed afterall because TTax had reduced my expenses incorrectly.

IMHO, TTax should, after it determines that you do not qualify for any credits or deductions, automatically return to "0" the amount to be considered for credits and deductions.

If I have this wrong, I hope someone will please correct me. But, I recall having this issue last year too.
I seem to be having an issue with Turbotax incorrectly not treating all my eligible 529 distributions as qualified. I've been going through it and can't figure out why. It did compute for my 2 kids that they should get the AOTC. And I did have $4k more expenses than 529 withdrawals for each child.

fundseeker - Perhaps I am hitting what you are hitting. Are you saying that it may have tried to use more than $4K to see if other deductions would be better? In my case, I didn't even qualify for the other deductions. Where did you tell Turbotax to "use "0" to look for credits or deductions"?
Mark

markcoop
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Wed Mar 13, 2019 6:33 am

To add a little more info for my situation. Sometimes you need to be a detective to figure this stuff out. I looked at the forms views and noticed a couple odd things:

1) It thinks part of my distribution was unqualified. However, it does not think any of it is subject to the 10% penalty. I think (not sure) that would be the case if what OP is saying is true.

2) I have 2 kids who had withdrawals: For one kid, the qualified amount is exactly equal to his room and board. In other words, the amount of the tuition and books is being computed as non-qualified. For the second child that is not the case. The only oddity I can determine playing around with the numbers on the form is that $6,000 is determined to be non-qualified. When added to the $4,000 expenses I paid out of pocket (to qualify for AOC), that equals $10K, which is the amount that could be used for the Lifetime Learning credit. For the latter kid, it also seems to support what the OP claimed, but no idea what's going on with the first kid's amount.

I also read on the TT web board someone else had complained about a similar issue. Not sure what all of this means. Maybe there is a bug in TT? I double checked all my responses and think everything is entered correctly.
Mark

marcopolo
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by marcopolo » Wed Mar 13, 2019 7:02 am

If you have more qualified expenses, beyond any amount used for AOTC, than you withdrew from the 529 ( which appears you do), then there is no need to include any of this info on your return. Save yourself the headache.
Once in a while you get shown the light, in the strangest of places if you look at it right.

gtd98765
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by gtd98765 » Wed Mar 13, 2019 7:48 am

Agree TT causes serious problems with 529 distributions, especially if you are not eligible for Coverdell or other programs. It does not offer clear guidance at all. What I have pieced together, no guarantees if it is accurate, is that 1099Q and 1098T are reported on the parent's, not the student's, tax return. Even though TT asks the student whether s/he has these forms, "no" is the correct answer even if it's not the truth. Anyway, that is what we did. If my next posts comes from prison, you'll know I was wrong.

A few helpful links from TT forum:

https://ttlc.intuit.com/questions/35628 ... or-student
https://ttlc.intuit.com/questions/35599 ... -and-1099q
https://ttlc.intuit.com/questions/26174 ... -me-parent

https://turbotax.intuit.com/tax-tips/co ... /L6yxSZA87
https://www.forbes.com/sites/josephhurl ... e823d26155

marcopolo
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by marcopolo » Wed Mar 13, 2019 7:51 am

gtd98765 wrote:
Wed Mar 13, 2019 7:48 am
Agree TT causes serious problems with 529 distributions, especially if you are not eligible for Coverdell or other programs. It does not offer clear guidance at all. What I have pieced together, no guarantees if it is accurate, is that 1099Q and 1098T are reported on the parent's, not the student's, tax return. Even though TT asks the student whether s/he has these forms, "no" is the correct answer even if it's not the truth. Anyway, that is what we did. If my next posts comes from prison, you'll know I was wrong.

A few helpful links from TT forum:

https://ttlc.intuit.com/questions/35628 ... or-student
https://ttlc.intuit.com/questions/35599 ... -and-1099q
https://ttlc.intuit.com/questions/26174 ... -me-parent

https://turbotax.intuit.com/tax-tips/co ... /L6yxSZA87
https://www.forbes.com/sites/josephhurl ... e823d26155
Unless you are making taxable withdrawals from the 529 (withdraw more than QHEE), there is no need to mess with any of this. There is no requirement to report the 1099Q or 1098T information on your return, unless taxes are due.
Once in a while you get shown the light, in the strangest of places if you look at it right.

markcoop
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Joined: Fri Mar 02, 2007 8:36 am

Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Wed Mar 13, 2019 8:48 am

marcopolo wrote:
Wed Mar 13, 2019 7:02 am
If you have more qualified expenses, beyond any amount used for AOTC, than you withdrew from the 529 ( which appears you do), then there is no need to include any of this info on your return. Save yourself the headache.
I understand the point and I may just end up doing that. However, just as the OP, I want to alert others of such issues (after all, isn't that one of the goals of this board). I can understand it when Turbotax does not handle the less common areas. For example, I had a post about TT not handling a withdrawal from a Coverdell that was subsequently deposited into the same beneficiary's 529 plan. It is considered a qualified withdrawal. Not many people do that, so fine. But 529s are used by many and I consider this a more common case. Now, this may very well be a small mistake I made somewhere. Sometimes we point our fingers too quickly at the potential culprit.
Mark

markcoop
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Wed Mar 13, 2019 6:28 pm

deleted
Mark

markcoop
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Wed Mar 13, 2019 6:53 pm

Found the answer on the Turbotax Q&A section.

The OP had it right. Figured out how to get to that question (it's not obvious):

1) Go to Expenses and Scholarships
2) Click Edit in the Education Expense Summary section
3) Click Edit for Education Information
4) After a few questions, the question about how much to apply for the education credits shows up. Assuming you want to take the AOTC, I see no reason to enter anything above $4000.
Mark

Topic Author
fundseeker
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by fundseeker » Wed Mar 13, 2019 8:01 pm

markcoop, Glad you found the way to change to amount you want TTax to use for the AOC, etc. Sorry for the delay, but this work thing.....

For me, we did not qualify for the AOC because we already got four years (the max) and our AGI eliminated any LLC. So, I had to go to the place you found and change the number to 0 to prevent being taxed on our 529 distributions. Tax should have done that itself if it saw that I got "0" AOC and LLC.

Hope the rest of your returns go smoothly!

markcoop
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by markcoop » Thu Mar 14, 2019 8:57 am

One thing to add, if you want to verify Turbotax has it correct, go to the forms views and look at the bottom of the 1099Q form. There's a section that computes unqualified withdrawals.
Mark

RetiredCSProf
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Re: Use caution to not incorrectly pay taxes on 529 distribution in TTax

Post by RetiredCSProf » Sun Mar 17, 2019 7:21 pm

I posted a similar thread last month. See
viewtopic.php?f=2&t=272132

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