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?

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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

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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

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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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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

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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

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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

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

Post by gtd98765 » Mon Feb 17, 2020 10:39 am

markcoop wrote:
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.
Unfortunately, at least In the 2019 version I do not have an option to "edit" in the Education Information section. Using desktop version.

It appears that TT still has this bug that will significantly increase taxes for some unwary recipients of 529 distributions (i.e., those that receive 529 distributions themselves to reimburse qualified expenses such as rent for off-campus housing, and are not eligible for Coverdale or other assistance programs). I realize I do not have to input the 1099Q info at all, which is the course I will take, but it's a shame that TT has still not fixed this bug which has been identified for years.

I have tried all the methods I have found on the TT community forum to correct this issue, but I can never get to the screens the other users indicate can solve the problem, by replacing a 10,000 entry with 0.

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

Post by teen persuasion » Mon Feb 17, 2020 12:54 pm

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
I realize this is a year old, but still relevant.

Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.

So I was interested to see your comment that the 1098t should be reported on the parents' return, not the student. Read thru your links, and found there's a difference based on whether the scholarships exceed tuition. If scholarships exceed tuition, and thus are reported as taxable income (which is what we are deliberately forcing, for AOTC eligibility), the student reports the 1098t. The explanations were nice and thorough, mostly fitting my understanding of the process/rules, but at the very end the one answer stated there was one and only one way to allocate scholarship and OOP $ over tuition vs R&B expenses (for AOTC purposes) which us completely at odds with the IRS examples and tips. The IRS instruction booklet clearly says you can shift your mental allocations as desired, to allow you to capture a credit, as long as you then claim taxable scholarships as income - which is precisely what we are doing.

So those links and "answers" are sometimes helpful, sometimes misleading.

TurboTax could definitely make things easier - they've made it obnoxiously difficult to report "taxable scholarship income" (line 1 this year), because it is addressed only in the deductions and credits section, not in income as you'd expect. And then, the 1098t screen is not front and center, as you expect, it is buried.

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

Post by HereToLearn » Mon Feb 17, 2020 1:03 pm

teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
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
I realize this is a year old, but still relevant.

Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.

So I was interested to see your comment that the 1098t should be reported on the parents' return, not the student. Read thru your links, and found there's a difference based on whether the scholarships exceed tuition. If scholarships exceed tuition, and thus are reported as taxable income (which is what we are deliberately forcing, for AOTC eligibility), the student reports the 1098t. The explanations were nice and thorough, mostly fitting my understanding of the process/rules, but at the very end the one answer stated there was one and only one way to allocate scholarship and OOP $ over tuition vs R&B expenses (for AOTC purposes) which us completely at odds with the IRS examples and tips. The IRS instruction booklet clearly says you can shift your mental allocations as desired, to allow you to capture a credit, as long as you then claim taxable scholarships as income - which is precisely what we are doing.

So those links and "answers" are sometimes helpful, sometimes misleading.

TurboTax could definitely make things easier - they've made it obnoxiously difficult to report "taxable scholarship income" (line 1 this year), because it is addressed only in the deductions and credits section, not in income as you'd expect. And then, the 1098t screen is not front and center, as you expect, it is buried.
I enjoyed reading your detailed explanation, not because of the frustration you endured, but to know that others rage against TT with some of these student situations. I have gone around in circles attempting to figure out if I even need to report summer research stipend earnings. Won't digress here, but I resorted to starting new returns for my college student because I couldn't figure out how to 'undo' my interview responses. Some of the college student reporting is far more complicated than it should be.

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

Post by fundseeker » Mon Feb 17, 2020 1:18 pm

gtd98765,

OP here. I just checked and the process in my 2019 TTax Premier. is on the student's return, to go to Deductions & Credits, click on "Update" by the Expenses and Scholarships line, and after a series of questions, you will get to the page that allows you to enter the amount to consider for a tax or credit deduction. That is where you might change $4,000 to $2,000, or all the way to zero if you get neither credits nor deductions.

TTax plugged in $10,000 for us this year leaving me with taxes due on our 529 distributions. Fortunately, I knew to change that number to zero since we are not elgible for credits or deductions. Good luck everyone!

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

Post by markcoop » Mon Feb 17, 2020 1:43 pm

Forgot the good memories of this thread. It did prompt me to look at what I did this year to make sure I got everything correct. All is fine, however there was one screen I am not sure I fully understand (but don't think there is any harm) when entering the school expenses. It says:

"We'll make this entry zero that's no longer needed

Earlier you told us to treat $0 as a taxable education distribution in order to claim education tax credit or deduction. However, it's no longer beneficial for any amount to be treated as a taxable distribution and used for an education credit or deduction, so we'll just make this entry zero."


Perhaps at one point I told TT a value other than $0, but clearly this makes no sense as shown on my screen. But it causes no harm. Regardless, this screen does make me think like it may have fixed the original problem as it sounds like it is trying to compute if it makes sense to use any 529 distribution as taxable, regardless of what you might have told TT (or perhaps TT learned in the interview).
Mark

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

Post by DIFAR31 » Mon Feb 17, 2020 1:53 pm

teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
For purposes of form 8615 (the "kiddie tax"), taxable scholarships are considered to be unearned income and are therefore subject to the kiddie tax. This is in contrast to figuring out the standard deduction for a tax dependent, when taxable scholarships are considered to be earned income (which is good as it results in a higher standard deduction).

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

Post by HereToLearn » Mon Feb 17, 2020 2:11 pm

DIFAR31 wrote:
Mon Feb 17, 2020 1:53 pm
teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
For purposes of form 8615 (the "kiddie tax"), taxable scholarships are considered to be unearned income and are therefore subject to the kiddie tax. This is in contrast to figuring out the standard deduction for a tax dependent, when taxable scholarships are considered to be earned income (which is good as it results in a higher standard deduction).
This does not apply to me, but I have wondered if students on full financial aid have to pay the kiddie tax on the amount of the financial aid award that covers room & board? I imagine that returning to the use of parents' marginal rate will greatly reduce their tax burden. I can't imagine how someone on full financial aid would have the cash to pay the taxes? Or does the unearned income calculation only come in to play for non-need based full ride awards? (There aren't many of those out there, but some do exist.)

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

Post by teen persuasion » Mon Feb 17, 2020 2:22 pm

DIFAR31 wrote:
Mon Feb 17, 2020 1:53 pm
teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
For purposes of form 8615 (the "kiddie tax"), taxable scholarships are considered to be unearned income and are therefore subject to the kiddie tax. This is in contrast to figuring out the standard deduction for a tax dependent, when taxable scholarships are considered to be earned income (which is good as it results in a higher standard deduction).
Thanks for pointing out the distinction.

Looking at the form 8615 info in the 1040 instructions, it says you must file 8615 if you meet ALL conditions :
1. Had more than $2200 unearned income (taxable interest, ordinary dividends, or capital gains)
2. Required to file a tax return
3 c. Full-time student under 24 and didn't have earned income more than half your support
4. At least one parent alive
5. Don't file a joint return

As far as I can tell, he's not required to file a return. He is just to get withholdings back. The 8615 form doesn't add any federal tax to his return.

Also curious if the designation of taxable scholarship income as unearned income is for 1 above, or 3 above, or both. Scholarships are not mentioned in 1, but I can see how it is valid for 3, just as in the dependency support test where scholarships aren't included in support.

DIFAR31
Posts: 412
Joined: Mon Jan 01, 2018 5:51 pm

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

Post by DIFAR31 » Mon Feb 17, 2020 2:25 pm

HereToLearn wrote:
Mon Feb 17, 2020 2:11 pm
DIFAR31 wrote:
Mon Feb 17, 2020 1:53 pm
teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
For purposes of form 8615 (the "kiddie tax"), taxable scholarships are considered to be unearned income and are therefore subject to the kiddie tax. This is in contrast to figuring out the standard deduction for a tax dependent, when taxable scholarships are considered to be earned income (which is good as it results in a higher standard deduction).
This does not apply to me, but I have wondered if students on full financial aid have to pay the kiddie tax on the amount of the financial aid award that covers room & board?
If the standard deduction does not fully cover taxable income, yes.

I imagine that returning to the use of parents' marginal rate will greatly reduce their tax burden.
Using the parents' marginal tax rate when figuring the kiddie tax is an option now, and if the kiddie tax owed stays in the lowest estates and trusts bracket (10%), it may not make any difference.

I can't imagine how someone on full financial aid would have the cash to pay the taxes?
Possibly federal direct student loans, as a last resort.

Or does the unearned income calculation only come in to play for non-need based full ride awards? (There aren't many of those out there, but some do exist.)
It doesn't matter if the scholarship/grant paying non-qualified expenses is need-based aid or merit aid.

HereToLearn
Posts: 653
Joined: Sat Mar 17, 2018 5:53 pm

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

Post by HereToLearn » Mon Feb 17, 2020 2:50 pm

DIFAR31 wrote:
Mon Feb 17, 2020 2:25 pm
HereToLearn wrote:
Mon Feb 17, 2020 2:11 pm
DIFAR31 wrote:
Mon Feb 17, 2020 1:53 pm
teen persuasion wrote:
Mon Feb 17, 2020 12:54 pm
Working on DS4's taxes with him yesterday (while he was home briefly) in TT, and going round in circles trying to get TT to let me enter the right numbers in the right places. We're not using a 529, but are having him claim some of his scholarships as taxable income so that we can claim the AOTC. We've done this before, actually based on IRS instructions, so I know where things go on the tax forms, but getting the TT interview to the fields I need is frustrating. We never got a "enter your 1098T form info" screen on our initial pass thru, but instead got several screens to enter info on scholarship amounts. Searching for the 1098t section, I eventually stumbled on it, and entered info, but now we had doubled scholarship totals (which messed with the state taxes, badly). Removing the extraneous entries from the scholarship screen was an improvement, but a "helpful" info box said that we should adjust (subtract) the scholarship amount to compensate for the ~$4k we were adding to taxable scholarship income. Round in circles again, to find an edit option for the 1098t (it's not on the entry's line, it's the line below it!).

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
For purposes of form 8615 (the "kiddie tax"), taxable scholarships are considered to be unearned income and are therefore subject to the kiddie tax. This is in contrast to figuring out the standard deduction for a tax dependent, when taxable scholarships are considered to be earned income (which is good as it results in a higher standard deduction).
This does not apply to me, but I have wondered if students on full financial aid have to pay the kiddie tax on the amount of the financial aid award that covers room & board?
If the standard deduction does not fully cover taxable income, yes.

I imagine that returning to the use of parents' marginal rate will greatly reduce their tax burden.
Using the parents' marginal tax rate when figuring the kiddie tax is an option now, and if the kiddie tax owed stays in the lowest estates and trusts bracket (10%), it may not make any difference.

I can't imagine how someone on full financial aid would have the cash to pay the taxes?
Possibly federal direct student loans, as a last resort.

Or does the unearned income calculation only come in to play for non-need based full ride awards? (There aren't many of those out there, but some do exist.)
It doesn't matter if the scholarship/grant paying non-qualified expenses is need-based aid or merit aid.
Thank you for all of your responses. I have been curious about this since I first learned of the kiddie tax.

I thought that the standard deduction of $12,200 did not come into play when calculating kiddie taxes. R&B is over $16K at my child's school, so wouldn't have leave nearly $14K as taxed under kiddie tax rules? I realize that the parents' marginal rate for a full-needs family is probably the more attractive option, but still has to be a challenge.

Thanks again!

DIFAR31
Posts: 412
Joined: Mon Jan 01, 2018 5:51 pm

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

Post by DIFAR31 » Mon Feb 17, 2020 3:04 pm

HereToLearn wrote:
Mon Feb 17, 2020 2:50 pm
I thought that the standard deduction of $12,200 did not come into play when calculating kiddie taxes.
It comes into play in that if the standard deduction covers all the taxable income (including taxable scholarships), there is no requirement to file a return and therefore there is no need to calculate a kiddie tax (where taxable scholarships do make a difference based on their designation as unearned income).

R&B is over $16K at my child's school, so wouldn't have leave nearly $14K as taxed under kiddie tax rules?
If your child's only taxable income was $16k in taxable scholarships that paid for room and board, the standard deduction of $12,200 would reduce the amount subject to tax to $3,800.

gtd98765
Posts: 531
Joined: Sun Jan 08, 2017 4:15 am

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

Post by gtd98765 » Mon Feb 17, 2020 4:11 pm

Went back to the state, and got stuck in a loop - let's start your state, let's finish your state, add another state (no), let's...
Once I broke the loop, and got to a point I could look at the completed forms, I could see that "adjusting" the scholarship amount is not the correct way to do it. Back to fix the 1098t , again. Finally get to the end, and he can't file yet, because an IRS form is not yet available (8615, I think). Not sure he even needs to file it, it felt like I was pushed thru that form's screen on one of my circles looking for the 1098t screen - my answers were all no or no $ entry, but the useless form got generated and I see no way to eliminate it without starting over.
Realize it's too late for you, but might help others:

Using the desktop version of TT (instead of the online version) you can save multiple different tax files with different names. Remembering last year's experience on this issue, before I started working on the horrible student area I saved the file (using File/Save As) then I saved another copy called "529 experiment". This let me play with different options of entering expenses and distributions, while always having something to go back to if it all got screwed up (NB: it did). If the "529 experiment" version had worked out, then I could have just used that one as my final tax return version.

gtd98765
Posts: 531
Joined: Sun Jan 08, 2017 4:15 am

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

Post by gtd98765 » Mon Feb 17, 2020 4:45 pm

fundseeker wrote:
Mon Feb 17, 2020 1:18 pm
gtd98765,

OP here. I just checked and the process in my 2019 TTax Premier. is on the student's return, to go to Deductions & Credits, click on "Update" by the Expenses and Scholarships line, and after a series of questions, you will get to the page that allows you to enter the amount to consider for a tax or credit deduction. That is where you might change $4,000 to $2,000, or all the way to zero if you get neither credits nor deductions.

TTax plugged in $10,000 for us this year leaving me with taxes due on our 529 distributions. Fortunately, I knew to change that number to zero since we are not elgible for credits or deductions. Good luck everyone!
Thanks fundseeker. Unfortunately, I cannot get to this page. I start updating Expenses & scholarships, then get the following screens (each tick (-) is a screen):

- You can't claim tuition and other fees (income too high). Click continue to enter expenses to avoid paying tax on your education savings account or qualified tuition program [so far, so good, I want to avoid paying taxes on my 529 distributions, a QTP].
- Let's gather education expenses.
- I enter tuiton & books & materials costs; "no" on loan payments.
- we'll ask you about scholarships and financial aid.
- I enter "no" for fellowships, etc.
- four years of college before 2019? "no"
- first year of college? "no"
- american opportunity or hope credit? "no"
- drugs? "no"
- Your education expenses summary. [I can edit or delete the info I just described above, add a student, or continue].
- You can't claim an education tax break. [thanks, I knew that already!].
- back to 2019 deductions and credit page.

Despite having entered tuition & expenses on these prior screens, the "expenses and scholarships" line still says "$0".

Topic Author
fundseeker
Posts: 808
Joined: Mon Dec 24, 2007 9:02 am

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

Post by fundseeker » Thu Feb 20, 2020 9:05 pm

The only other thing I can suggest from memory without getting into TTax tonight is to go to View forms, click on the Student Info Worksheet form, and on the relevant line of that form (where it shows the amount used for credit or deduction), right click there, which should show Data Source as an option. Clicking on Data Source may open another form where you can change the amount to whatever you want. If that doesn't work, maybe I can dig deeper this weekend. Good luck!

cshell2
Posts: 359
Joined: Thu May 09, 2019 10:29 am

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

Post by cshell2 » Fri Feb 21, 2020 9:12 am

DIFAR31 wrote:
Mon Feb 17, 2020 3:04 pm
HereToLearn wrote:
Mon Feb 17, 2020 2:50 pm
I thought that the standard deduction of $12,200 did not come into play when calculating kiddie taxes.
It comes into play in that if the standard deduction covers all the taxable income (including taxable scholarships), there is no requirement to file a return and therefore there is no need to calculate a kiddie tax (where taxable scholarships do make a difference based on their designation as unearned income).

R&B is over $16K at my child's school, so wouldn't have leave nearly $14K as taxed under kiddie tax rules?
If your child's only taxable income was $16k in taxable scholarships that paid for room and board, the standard deduction of $12,200 would reduce the amount subject to tax to $3,800.
Well, this is kind of interesting to me right now as we're in the process of trying to decide between two schools. One is 3K/year more expensive, but it might not actually end up being that much of a difference due to the AOTC being more valuable at the costlier school.

School A- $24724 (tuition) - $21645 (taxable scholarships) = $3079
School B- $17542 (tuition) - $19504 (taxable scholarships) = -($1962)

So, I could push another 4K into taxable in school B to take the AOTC and end up with $5962 in taxable income. Along with his earned and unearned income this would be over the 12K standard deduction for sure. Or I could just claim the 3K at school A and not have to push any into taxable.

gtd98765
Posts: 531
Joined: Sun Jan 08, 2017 4:15 am

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

Post by gtd98765 » Fri Feb 21, 2020 8:21 pm

fundseeker wrote:
Thu Feb 20, 2020 9:05 pm
The only other thing I can suggest from memory without getting into TTax tonight is to go to View forms, click on the Student Info Worksheet form, and on the relevant line of that form (where it shows the amount used for credit or deduction), right click there, which should show Data Source as an option. Clicking on Data Source may open another form where you can change the amount to whatever you want. If that doesn't work, maybe I can dig deeper this weekend. Good luck!
Thanks very much, but no joy. It is not clear to me what the entries in that table are really do; most of them are empty, except for the expenses I entered during the interview; those show up, but for some reason do not affect the tax amount. On the TT forum I have seen reference to a worksheet where the default of $10k for the various tax credits is entered, and replacing that 10k with 0 solves the problem; but I can not get to that page via the methods described.

I appreciate your offer to help, but the easiest thing for me is to not enter the 1099Q at all; then all is okay. The only negative is I might have to respond to a CP2000 in a couple of years; but I have done that before and the IRS has accepted my explanation with no other trouble. Last year I did, and this year I will, write an explanation to put in my files with my tax return, so when the IRS writes I will not have to reconstruct what I did (which I had to do the first time).
Best, G

Katietsu
Posts: 3032
Joined: Sun Sep 22, 2013 1:48 am

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

Post by Katietsu » Fri Feb 21, 2020 8:40 pm

gtd98765 wrote:
Fri Feb 21, 2020 8:21 pm
fundseeker wrote:
Thu Feb 20, 2020 9:05 pm
The only other thing I can suggest from memory without getting into TTax tonight is to go to View forms, click on the Student Info Worksheet form, and on the relevant line of that form (where it shows the amount used for credit or deduction), right click there, which should show Data Source as an option. Clicking on Data Source may open another form where you can change the amount to whatever you want. If that doesn't work, maybe I can dig deeper this weekend. Good luck!
Thanks very much, but no joy. It is not clear to me what the entries in that table are really do; most of them are empty, except for the expenses I entered during the interview; those show up, but for some reason do not affect the tax amount. On the TT forum I have seen reference to a worksheet where the default of $10k for the various tax credits is entered, and replacing that 10k with 0 solves the problem; but I can not get to that page via the methods described.

I appreciate your offer to help, but the easiest thing for me is to not enter the 1099Q at all; then all is okay. The only negative is I might have to respond to a CP2000 in a couple of years; but I have done that before and the IRS has accepted my explanation with no other trouble. Last year I did, and this year I will, write an explanation to put in my files with my tax return, so when the IRS writes I will not have to reconstruct what I did (which I had to do the first time).
Best, G

The 1099-Q is not part of your tax return. The information from the 1099-Q is part of your return only if used for non qualified expenses or if 529 earnings are taxable because of claiming an education credit. In other words, in your case, if I understand it correctly, the 1099-Q goes nowhere except TurboTax. Your entries do not go to IRS even if you enter into TurboTax since your distributions are tax free. Not entering the 1099-Q will not increase or decrease your chance of corresponding with the IRS.

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