529 withdrawal option & 1009-Q

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RJ2010
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529 withdrawal option & 1009-Q

Post by RJ2010 »

I have 529 for my kid. For 529, does it make a difference if you let financial institution pay directly to the university or pay me (then I pay the university)?
I'm also confused about 1099-Q. From what I read, it says it's issued to beneficiary's SSN. How can I as a parent use that for tax return?
GenawithanE
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Re: 529 withdrawal option & 1009-Q

Post by GenawithanE »

I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
Last edited by GenawithanE on Mon May 03, 2021 9:23 pm, edited 1 time in total.
lazynovice
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Re: 529 withdrawal option & 1009-Q

Post by lazynovice »

1) No it does not matter.
2) The school will also issue the 1098 in your kids’ SSN. I have always put it on my kids” tax return and then gotten a huge warning from TurboTax that it should go on my return to qualify for AOTC and other credits. I don’t qualify for any of those so I proceed. Long way of saying, you can put it on your return.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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UpsetRaptor
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Re: 529 withdrawal option & 1009-Q

Post by UpsetRaptor »

If you have the financial institution pay the university directly, or if you have the withdrawal made out to the beneficiary, then the 1099-Q goes out to the student (assuming they're the 529 beneficiary) and ends up on their tax return. If you have the withdrawal made to you first, then the 1099-Q goes to you and ends up on your tax return.

This can make a difference in some situations. For example, if you use 529 funds to pay for American Opportunity Tax Credit (which you CAN do without paying any penalty, contrary to popular belief), then a lot of times for those double-dipped 529-AOTC funds you want to end up as income to the beneficiary, because that often results in low or no tax for most college kids. If those double-dipped funds end up on your tax return, then the pro-rated gains are taxed at your income tax rate.

Off-topic, but taxable scholarships are similar. A lot of times you want to finagle a taxable scholarship to end up on the student because of their low tax bracket, often resulting in low or no tax for most college kids.

This is making certain assumptions, such as the student does not have sufficient unearned income that the kiddie tax applies, nullifying these strategies.

If all 529 withdrawal is going to cover QEE (Qualified Education Expenses), then it does not matter.
Last edited by UpsetRaptor on Tue May 04, 2021 4:23 pm, edited 1 time in total.
DIFAR31
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Re: 529 withdrawal option & 1009-Q

Post by DIFAR31 »

lazynovice wrote: Mon May 03, 2021 9:20 pm 1) No it does not matter.
It can matter, especially if any part of a distribution is non-qualified, because a distribution made directly to the school will be reported under the beneficiary's SSN and a distribution made the the account owner/parent will be reported under the parent's SSN.

2) The school will also issue the 1098 in your kids’ SSN. I have always put it on my kids” tax return and then gotten a huge warning from TurboTax that it should go on my return to qualify for AOTC and other credits. I don’t qualify for any of those so I proceed. Long way of saying, you can put it on your return.
OP inquired about the 1099-Q issued by the 529 administrator and you are mixing in the 1098-T which is issued by the school. They are obviously not the same thing, and they are used for different purposes.
DIFAR31
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Re: 529 withdrawal option & 1009-Q

Post by DIFAR31 »

UpsetRaptor wrote: Tue May 04, 2021 3:04 pm Off-topic, but taxable scholarships are similar. A lot of times you want to finagle a taxable scholarship to end up on the student because of their low tax bracket, often resulting in low or no tax for most college kids.

This is making certain assumptions, such as the student does not have sufficient unearned income that the kiddie tax applies, nullifying these strategies.
A taxable scholarship can never be reported on a parent's tax return. It's taxable income to the recipient, which is the student, and never anyone else.
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UpsetRaptor
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Re: 529 withdrawal option & 1009-Q

Post by UpsetRaptor »

DIFAR31 wrote: Tue May 04, 2021 4:09 pm
UpsetRaptor wrote: Tue May 04, 2021 3:04 pm Off-topic, but taxable scholarships are similar. A lot of times you want to finagle a taxable scholarship to end up on the student because of their low tax bracket, often resulting in low or no tax for most college kids.

This is making certain assumptions, such as the student does not have sufficient unearned income that the kiddie tax applies, nullifying these strategies.
A taxable scholarship can never be reported on a parent's tax return. It's taxable income to the recipient, which is the student, and never anyone else.
:sharebeer

Corrected.
lazynovice
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Re: 529 withdrawal option & 1009-Q,

Post by lazynovice »

DIFAR31 wrote: Tue May 04, 2021 4:04 pm
lazynovice wrote: Mon May 03, 2021 9:20 pm 1) No it does not matter.
It can matter, especially if any part of a distribution is non-qualified, because a distribution made directly to the school will be reported under the beneficiary's SSN and a distribution made the the account owner/parent will be reported under the parent's SSN.

2) The school will also issue the 1098 in your kids’ SSN. I have always put it on my kids” tax return and then gotten a huge warning from TurboTax that it should go on my return to qualify for AOTC and other credits. I don’t qualify for any of those so I proceed. Long way of saying, you can put it on your return.
OP inquired about the 1099-Q issued by the 529 administrator and you are mixing in the 1098-T which is issued by the school. They are obviously not the same thing, and they are used for different purposes.
Nope, not mixing the two at all. How you know that is the word you skipped over and the fact that I called it a 1098 not a 1099.

Never heard of a non-qualified payment made directly to the school, but sure if you pay the school for something besides education or room and board, that would matter.

Have a great day!
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
DIFAR31
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Re: 529 withdrawal option & 1009-Q,

Post by DIFAR31 »

lazynovice wrote: Tue May 04, 2021 4:37 pm Nope, not mixing the two at all. How you know that is the word you skipped over and the fact that I called it a 1098 not a 1099.
It's all in the context, brother, which (IMO) isn't clear here. Apologies if I offended.
Never heard of a non-qualified payment made directly to the school, but sure if you pay the school for something besides education or room and board, that would matter.
Schools bill lots of items directly which are not 529 qualified expenses, and if you weren't paying attention or just didn't know any better it wouldn't be at all hard to pay the whole bill with a 529 distribution made directly to the school.
marcopolo
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Re: 529 withdrawal option & 1009-Q

Post by marcopolo »

GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Once in a while you get shown the light, in the strangest of places if you look at it right.
HereToLearn
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Re: 529 withdrawal option & 1009-Q

Post by HereToLearn »

marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check payable to the university for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
marcopolo
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Re: 529 withdrawal option & 1009-Q

Post by marcopolo »

HereToLearn wrote: Tue May 04, 2021 5:13 pm
marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
No need to jump through the multiple hoops.
As long as student is dependent, you can claim AOTC on your taxes based on 1098T issued to them. The taxable portion from 1099Q can then be reconciled on the student's taxes.

The problem with 1099Q in your name is the taxable portion of the $4k used to claim AOTC becomes taxable to you rather than the student. If you tax bracket is higher, this will cause more taxes due.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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cowdogman
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Re: 529 withdrawal option & 1009-Q

Post by cowdogman »

marcopolo wrote: Tue May 04, 2021 5:20 pm
HereToLearn wrote: Tue May 04, 2021 5:13 pm
marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
No need to jump through the multiple hoops.
As long as student is dependent, you can claim AOTC on your taxes based on 1098T issued to them. The taxable portion from 1099Q can then be reconciled on the student's taxes.

The problem with 1099Q in your name is the taxable portion of the $4k used to claim AOTC becomes taxable to you rather than the student. If you tax bracket is higher, this will cause more taxes due.
MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
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UpsetRaptor
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Re: 529 withdrawal option & 1009-Q

Post by UpsetRaptor »

cowdogman wrote: Tue May 04, 2021 7:28 pm
marcopolo wrote: Tue May 04, 2021 5:20 pm
HereToLearn wrote: Tue May 04, 2021 5:13 pm
marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
No need to jump through the multiple hoops.
As long as student is dependent, you can claim AOTC on your taxes based on 1098T issued to them. The taxable portion from 1099Q can then be reconciled on the student's taxes.

The problem with 1099Q in your name is the taxable portion of the $4k used to claim AOTC becomes taxable to you rather than the student. If you tax bracket is higher, this will cause more taxes due.
MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Most everything's right, except that on the bolded, it'd go on the student's return, not the parents. Example 2 on page 61 of pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf

You'd want the income on the student's return anyways, at least for most college kids.

I've been thinking that, for reference purposes, we may need a high level "You can use 529 funds for AOTC" thread and explain the details, pros/cons, and help clear up the misconception that it's not possible. This just seems to come up a lot. Maybe I'll overcome my laziness eventually.
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gobel
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Re: 529 withdrawal option & 1009-Q

Post by gobel »

marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
I don't think it is double dipping since you are paying tax on the earnings. The part used for AOTC turns into a non-qualified withdrawal, however AOTC is one of the exceptions that waives the 10% penalty (just like scholarships or death or disability). You still owe any taxes on the earnings (also better check that if you got a state deduction, whether they want recapture on that too, idk).
HereToLearn
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Re: 529 withdrawal option & 1009-Q

Post by HereToLearn »

UpsetRaptor wrote: Tue May 04, 2021 8:24 pm
cowdogman wrote: Tue May 04, 2021 7:28 pm
marcopolo wrote: Tue May 04, 2021 5:20 pm
HereToLearn wrote: Tue May 04, 2021 5:13 pm
marcopolo wrote: Tue May 04, 2021 4:51 pm

The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
No need to jump through the multiple hoops.
As long as student is dependent, you can claim AOTC on your taxes based on 1098T issued to them. The taxable portion from 1099Q can then be reconciled on the student's taxes.

The problem with 1099Q in your name is the taxable portion of the $4k used to claim AOTC becomes taxable to you rather than the student. If you tax bracket is higher, this will cause more taxes due.
MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Most everything's right, except that on the bolded, it'd go on the student's return, not the parents. Example 2 on page 61 of pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf

You'd want the income on the student's return anyways, at least for most college kids.

I've been thinking that, for reference purposes, we may need a high level "You can use 529 funds for AOTC" thread and explain the details, pros/cons, and help clear up the misconception that it's not possible. This just seems to come up a lot. Maybe I'll overcome my laziness eventually.
Interesting, and thank you. I assumed that I would need to report the income from the earnings portion of the $4K distribution on my return so that I could claim the AOTC. My student would have a lower federal and state rate, so that is something to consider for this year.

If you ever do decide you want to create a high level 529 & AOTC thread, another college student topic that I keep going around in circles on is the definition of dependent, and if 529 payments from parent-owned FBO 529 accounts are considered support by the parent or support by the student.
HereToLearn
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Re: 529 withdrawal option & 1009-Q

Post by HereToLearn »

cowdogman wrote: Tue May 04, 2021 7:28 pm
marcopolo wrote: Tue May 04, 2021 5:20 pm
HereToLearn wrote: Tue May 04, 2021 5:13 pm
marcopolo wrote: Tue May 04, 2021 4:51 pm
GenawithanE wrote: Mon May 03, 2021 9:16 pm I seem to recall there was a benefit to having the 529 plan pay the college directly but don’t recall what it was.

The 1099q is the information about how much was withdrawn. You want to keep records to show that at least the amount of the 529 withdrawal was used for qualified education expenses because if not, there are taxes and penalties to be calculated.

As a parent who claims the college student as a dependent, you cannot double dip. If you have education expenses you want to count toward the American Opportunity Credit or the Lifetime Learning Credit, they cannot have been paid from a 529.

Sometimes it makes sense to have the student declare some of the 529 withdrawal as income and not count it as educational expense. This is complicated so you should work with a professional to plan it and file the tax returns.
The highlighted statement is not correct. You can double dip, and that is one possible advantage to have payment sent directly to school, or the student. In that case the 1099Q will be issued to student. The gains attriburable to the $4000 used to also claim AOTC (double dipped), is taxable income, but no 10% penalty. Having that assigned to student can in many cases result in little or no taxes due.
Reading this, it appears that I am jumping through a hoop that I don't need to. I have the 529 administrator issue a check for the full tuition, R&B less $4K, then I write a personal check for $4K, and reimburse myself at year end for $4K from the 529 plan. I report the income portion of the $4K distribution, and after much fiddling with TurboTax (and help from this forum) manage to not pay a 10% penalty. I do this so that the 1099-Q for the $4K distribution will be issued to me.

Another thread discussed the definition of dependents, and I am now tempted to have the 529 plan issue the full tuition, R&B payment to me so that the 1099-Q will be in my name, in case a question of support arises. (Off-topic)
No need to jump through the multiple hoops.
As long as student is dependent, you can claim AOTC on your taxes based on 1098T issued to them. The taxable portion from 1099Q can then be reconciled on the student's taxes.

The problem with 1099Q in your name is the taxable portion of the $4k used to claim AOTC becomes taxable to you rather than the student. If you tax bracket is higher, this will cause more taxes due.
MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Thanks MarcoPolo and CowDogMan.

Fortunately my taxes are not terribly high (HOH brackets) so no fear of the additional 3.8%, and I am familiar with the dreaded Kiddie Tax b/c of summer research fellowship award (Grr...). When the tax laws were changed to allow grad students to use stipend income to fund Roths, they should have considered undergrads also. I digress.
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cowdogman
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Re: 529 withdrawal option & 1009-Q

Post by cowdogman »

UpsetRaptor wrote: Tue May 04, 2021 8:24 pm
cowdogman wrote: Tue May 04, 2021 7:28 pm

MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Most everything's right, except that on the bolded, it'd go on the student's return, not the parents. Example 2 on page 61 of pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf

You'd want the income on the student's return anyways, at least for most college kids.

I've been thinking that, for reference purposes, we may need a high level "You can use 529 funds for AOTC" thread and explain the details, pros/cons, and help clear up the misconception that it's not possible. This just seems to come up a lot. Maybe I'll overcome my laziness eventually.
Correct about the bolded part, but keep in mind that any non-qualified distribution to the student over $1,100 is going to be taxed at the parents' rate. So if the $4,000 was comprised of $2,000 principal and $2,000 earnings, part of the earnings will be taxed at the parents' rate. But I agree that there is an incremental benefit to putting it on the student's return.

(And BTW I think you, Useful Raptor, taught me about the $4,000 in the first place. Thanks for that!)

Another good tutorial thread would be allocating a 1098-T between parent and student returns when there are 1099-Qs to both parent(s) and student. After a few years of doing it I think I have it down, but even this year I had to stop and wonder "ok, how did I do this last year?"
DIFAR31
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Re: 529 withdrawal option & 1009-Q

Post by DIFAR31 »

cowdogman wrote: Wed May 05, 2021 9:14 am
UpsetRaptor wrote: Tue May 04, 2021 8:24 pm
cowdogman wrote: Tue May 04, 2021 7:28 pm

MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Most everything's right, except that on the bolded, it'd go on the student's return, not the parents. Example 2 on page 61 of pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf

You'd want the income on the student's return anyways, at least for most college kids.

I've been thinking that, for reference purposes, we may need a high level "You can use 529 funds for AOTC" thread and explain the details, pros/cons, and help clear up the misconception that it's not possible. This just seems to come up a lot. Maybe I'll overcome my laziness eventually.
Correct about the bolded part, but keep in mind that any non-qualified distribution to the student over $1,100 is going to be taxed at the parents' rate. So if the $4,000 was comprised of $2,000 principal and $2,000 earnings, part of the earnings will be taxed at the parents' rate. But I agree that there is an incremental benefit to putting it on the student's return.

(And BTW I think you, Useful Raptor, taught me about the $4,000 in the first place. Thanks for that!)

Another good tutorial thread would be allocating a 1098-T between parent and student returns when there are 1099-Qs to both parent(s) and student. After a few years of doing it I think I have it down, but even this year I had to stop and wonder "ok, how did I do this last year?"
Not quite. If, using your example, the only taxable income the student had to report was the $2,000 in 529 earnings, the first $1,100 of that would be the student's standard deduction (assuming the student can be claimed as a dependent on someone else's tax return), and the next $900 would be taxed at the student's rate (10%).
Topic Author
RJ2010
Posts: 81
Joined: Tue Dec 15, 2020 9:32 pm

Re: 529 withdrawal option & 1009-Q

Post by RJ2010 »

thank you all for chiming in. OP here.
Clarification:
1. Our income disqualifies us form taking AOTC.
2. we intend to use all withdrawals for qualified educational expenses.

With the above two in mind, here is what I understand (please correct me if this is wrong):
1. 529 payment can be sent to University, parent or child.
2. if sent to child or University, 1099-Q is issued to child's SSN.
3. If sent to parent, 1099-Q is issued to parent's SSN.
4. it doesn't matter where the money is sent (University, parent or child), no tax is owed when used for qualified expenses. From tax return perspective, it's a matter of reporting it on parent's or child's tax return.
DIFAR31
Posts: 611
Joined: Mon Jan 01, 2018 5:51 pm

Re: 529 withdrawal option & 1009-Q

Post by DIFAR31 »

RJ2010 wrote: Wed May 05, 2021 10:14 am thank you all for chiming in. OP here.

1. Our income disqualifies us form taking AOTC.
2. we intend to use all withdrawal for qualified expenses.

With the above two in mind, here is what I understand:
1. 529 payment can be sent to University, parent or child.
2. if sent to child or University, 1099-Q is issued to child SSN.
3. If sent to parent, 1099-Q is issued to parent SSN.
4. it doesn't matter where the money is sent (University, parent or child), no tax is owed when used for qualified expenses. From Tax return perspective, it's a matter of reporting it.
If 100% of the 529 distributions are used for qualified expenses, there is no reporting of anything 529 related.
HereToLearn
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Re: 529 withdrawal option & 1009-Q

Post by HereToLearn »

cowdogman wrote: Wed May 05, 2021 9:14 am
UpsetRaptor wrote: Tue May 04, 2021 8:24 pm
cowdogman wrote: Tue May 04, 2021 7:28 pm

MarcoPolo is correct. Took me a couple years to learn that lesson. You can pay all qualified expenses with 529 money and still take the AOTC by including the earnings (just the earnings) of a $4,000 529 distribution on your (the parents') return.

Another lesson is to have all the payments go to the parent or the student (payments direct to the university are treated as payments to the student). That way you won't have to wrestle with TurboTax to allocate the qualified expenses between two returns. It's not that difficult but still a hassle.

And as for payments to a dependent student (or university) be careful if you will have distributions in excess of qualified expenses. Under the Kiddie tax the student will pay tax on unearned income over $1,100 as if the amount were added to the parents' return (that is, generally, at the parents' top rate), including, I believe, the 3.8% NIT.
Most everything's right, except that on the bolded, it'd go on the student's return, not the parents. Example 2 on page 61 of pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf

You'd want the income on the student's return anyways, at least for most college kids.

I've been thinking that, for reference purposes, we may need a high level "You can use 529 funds for AOTC" thread and explain the details, pros/cons, and help clear up the misconception that it's not possible. This just seems to come up a lot. Maybe I'll overcome my laziness eventually.
Correct about the bolded part, but keep in mind that any non-qualified distribution to the student over $1,100 is going to be taxed at the parents' rate. So if the $4,000 was comprised of $2,000 principal and $2,000 earnings, part of the earnings will be taxed at the parents' rate. But I agree that there is an incremental benefit to putting it on the student's return.

(And BTW I think you, Useful Raptor, taught me about the $4,000 in the first place. Thanks for that!)

Another good tutorial thread would be allocating a 1098-T between parent and student returns when there are 1099-Qs to both parent(s) and student. After a few years of doing it I think I have it down, but even this year I had to stop and wonder "ok, how did I do this last year?"
Your last paragraph has me wondering what else I may have missed or be doing incorrectly. Honestly, given the cost of higher education, a full subsection dedicated to all of the financial issues would be very helpful. Everything from tax-efficient savings, financial aid implications, AOTC and/or LLC, 529 disbursements, how to wrangle with TurboTax, and dependent definition while students are enrolled full time. I am probably overlooking a couple of topics.
marcopolo
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Re: 529 withdrawal option & 1009-Q

Post by marcopolo »

RJ2010 wrote: Wed May 05, 2021 10:14 am thank you all for chiming in. OP here.
Clarification:
1. Our income disqualifies us form taking AOTC.
2. we intend to use all withdrawals for qualified educational expenses.

With the above two in mind, here is what I understand (please correct me if this is wrong):
1. 529 payment can be sent to University, parent or child.
2. if sent to child or University, 1099-Q is issued to child's SSN.
3. If sent to parent, 1099-Q is issued to parent's SSN.
4. it doesn't matter where the money is sent (University, parent or child), no tax is owed when used for qualified expenses. From tax return perspective, it's a matter of reporting it on parent's or child's tax return.
If there are no taxable withdrawals and no tax credits/deductions, there is no need to report anything on either tax return. No need to enter 1099Q or 1098T info onto tax return, or even into tax software.
Once in a while you get shown the light, in the strangest of places if you look at it right.
SchruteB&B
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Re: 529 withdrawal option & 1009-Q

Post by SchruteB&B »

marcopolo wrote: Wed May 05, 2021 12:06 pm

If there are no taxable withdrawals and no tax credits/deductions, there is no need to report anything on either tax return. No need to enter 1099Q or 1098T info onto tax return, or even into tax software.
Thank you to you and DIFAR31 for pointing this out, it seems to be a missed point often in these 529 discussions
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cowdogman
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Location: Washington State

Re: 529 withdrawal option & 1009-Q

Post by cowdogman »

marcopolo wrote: Wed May 05, 2021 12:06 pm
RJ2010 wrote: Wed May 05, 2021 10:14 am thank you all for chiming in. OP here.
Clarification:
1. Our income disqualifies us form taking AOTC.
2. we intend to use all withdrawals for qualified educational expenses.

With the above two in mind, here is what I understand (please correct me if this is wrong):
1. 529 payment can be sent to University, parent or child.
2. if sent to child or University, 1099-Q is issued to child's SSN.
3. If sent to parent, 1099-Q is issued to parent's SSN.
4. it doesn't matter where the money is sent (University, parent or child), no tax is owed when used for qualified expenses. From tax return perspective, it's a matter of reporting it on parent's or child's tax return.
If there are no taxable withdrawals and no tax credits/deductions, there is no need to report anything on either tax return. No need to enter 1099Q or 1098T info onto tax return, or even into tax software.
And if you do enter into TurboTax (where there are no taxable withdrawals and no tax credits/deductions) nothing is reported to the IRS (just as if you didn't enter it), BUT you have all the amounts in TurboTax for future reference. The "student worksheet" generated by TurboTax may come in handy later--even tho it doesn't get filed with the IRS. Just make sure you save your return as a PDF *with all worksheets*.
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cowdogman
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Location: Washington State

Re: 529 withdrawal option & 1009-Q

Post by cowdogman »

[quote=DIFAR31 post_id=5987626 time=1620226141 user_id=128763

Not quite. If, using your example, the only taxable income the student had to report was the $2,000 in 529 earnings, the first $1,100 of that would be the student's standard deduction (assuming the student can be claimed as a dependent on someone else's tax return), and the next $900 would be taxed at the student's rate (10%).
[/quote]

You're right, the threshold for tax at the parent's rate is $2,200, not $1,100.

https://www.irs.gov/taxtopics/tc553
Topic Author
RJ2010
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Re: 529 withdrawal option & 1009-Q

Post by RJ2010 »

I'm actually puzzled by a few comments that you don't even report 1099-Q in tax return (if all used for qualified expenses). This is odd because you always have to report 1099-R. is this really true?
DIFAR31
Posts: 611
Joined: Mon Jan 01, 2018 5:51 pm

Re: 529 withdrawal option & 1009-Q

Post by DIFAR31 »

RJ2010 wrote: Wed May 05, 2021 10:08 pm I'm actually puzzled by a few comments that you don't even report 1099-Q in tax return (if all used for qualified expenses). This is odd because you always have to report 1099-R. is this really true?
Yes, this is really true.
marcopolo
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Re: 529 withdrawal option & 1009-Q

Post by marcopolo »

RJ2010 wrote: Wed May 05, 2021 10:08 pm I'm actually puzzled by a few comments that you don't even report 1099-Q in tax return (if all used for qualified expenses). This is odd because you always have to report 1099-R. is this really true?
Yes. It is true.

If you look at the tax forms, there is no place to report anything about 529 withdrawals. The only entry for the taxable portion of withdrawals is on schedule 1, line 8 "Other Income" (and you add a note saying it was from 529 plan). All the stuff you enter into tax software is used to calculate the single entry on this line. If that happens to be $0 because all your withdrawals were for qualified expenses, then the tax software does nothing with all the info you just entered. The IRS does not see the info you enter into the tax software.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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