1099-Q issued in parent's name

in article C3CA753D.D3D6F% snipped-for-privacy@one.net, Frank S. Duke, Jr. at snipped-for-privacy@one.net wrote on 2/2/08 10:02 PM:

I guess I should have gone to the code in the first place. When you read it, the whole issue becomes clear. 529(c)(3)(B)(i) says that "In-kind distributions. No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which if paid by the distributee would constitute payment for a qualified higher education expense...."

529(c)(3)(B)(iv) Treatment of distributions - Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for the purposes of this paragraph.

I interpret that to mean that the owner can take the distribution as long as he or she uses it for the educational expenses of the beneficiary.

I have further concluded that:

1. The reporting process is a farce and provides the IRS with no information for tax enforcement or audit. The 1099Q reports a broader set of educational expenses than the 1098T so there can be no matching between the

529 plan disbursements and the 1098T report.

1. Since the 529 withdrawal can be made by the plan owner instead of the beneficiary, there is no requirement that the TINs on the two forms be the same, making them impossible to match.
2. The 1098T is only used to report receipt of tuition and fees for calculating the education adjustment and the Hope and Lifetime Learning Credit.
3. If tax is due, because the funds were not spent for education, it is up to the taxpayer to own up to it and report them appropriately on line 21 of the form 1040 and then calculate the penalty.
4. MAJOR CAUTION - If a taxpayer gives you a 1099Q in the name of the plan owner instead of the beneficiary and you enter it into Intuit ProSeries (and perhaps other software), the default position is to calculate the tax based on the 1099Q and compute the penalty as though it was taxable. The only way to eliminate the tax and penalty is to enter educational expenses equal to or greater than the distribution. Your only choices on a joint return are expenses of the spouse and taxpayer. If you conclude that the child was the one with the expenses and leave this blank, you will pay the tax. If the

1099Q is issued in the name of the beneficiary who actually had the expenses, it works. Either way, if the expenses are adequate to cover the distribution, nothing appears in the tax return that you actually file.

1. Question - So what does the IRS do with the 1099Q. If they get one, they know there was a distribution that was potentially taxable but they don't have anything to tell them the taxpayer actually had educational expenses. The only thing they know is that the taxpayer did not report any. Was it because they had sufficient qualified expenses or because they took the money spent it in Las Vegas and just did not report it. Some control, huh?

This is my best understanding of how all this works based on the last two days of research. Does anyone have a different take on it? Comments would be welcome. In my 12 years in the business, I have only seen 3 of these

1099Qs. I guess we will be seeing a lot more in the future.

All freely provided advice guarantee correct or double your money back

Frank S. Duke, Jr. CPA Cincinnati, OH USA

The 1098-T is also a farce. I haven't seen even one this tax season that was usable. Each one showed the amount billed. When I asked how much was actually paid... they weren't sure. When I asked whether the State of NM or an Indian Tribe/Pueblo granted them a scholarship or paid the tuition the answer was yes. Box 5 was blank.