1099-Q Questions

My daughter is in her second year of University. I have two 529 plans for her - a prepaid tuition plan and a plan for other qualified expenses (room, board, books).

She receives scholarships that cover about 60% of her tuition/fees, so that much of the prepaid tuition plan can go toward room, board, and books.

She was in an off-campus apartment for the January - May 2012 semester. Since she had scholarships, I asked the prepaid tuition plan to send the amount still available to her apartment landlord directly, and they did.

I subsequently learned that the prepaid college trust has a peculiar policy, whereby if they pay the University directly, or reimburse my daughter, the beneficiary, those funds and gain go on a 1099-Q in her name/SSN. However, if they pay anyone else, as in the case of the apartment landlord, the

1099-Q for that distribution/gain goes to the account owner/SSN, in this case, me.

I have a statement showing the check went straight to the landlord. I drew no more funds for room and board than the University's provided off-campus budget.

How do I handle the 1099-Q in my name/SSN? Do I just say that this was for QEEs, and therefore ignore it? I shouldn't have to declare the gain as income as it went to my daughter's QEEs directly; however, the 1099-Q in my name could suggest that the proceeds came to me, and I'm not the student.

Please advise.

Related, I also am taking the American Opportunity Credit, so I have to subtract $4000 from my daughter's AQEE to compute a portion of the gain on her 1099-Q as taxable Other Income on her 1040. How if at all would the

1099-Q in my name affect this? The AOC is for tuition/fees only, and the distribution on my 1099-Q is for room only, so again I feel my return should not be impacted, but I should not include that distribution in my daughter's computations either.
Reply to
Dimitrios Paskoudniakis
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This is not peculiar. It is the rule. Payments made to the designated beneficiary or the school get reflected in the designated beneficiary

1099-Q. All other payments get reported to the account owner.

For purposes of computing whether there is a taxable amount, you disregard who received the 1099s. Just add them together. Assuming that there were enough qualified expenses for the AOTC, the AQEE would be calculated by adding up the AOTC expenses, adding the allowable room and board under the QTP rules, subtracting the scholarships, and subtracting the $4000 used for the AOTC. You then compare the AQEE to the QTP distribution (the sum of the two 1099-Qs). If AQEE is equal to or higher than the distribution, there is no taxable amount. If it is less there is a taxable amount. The only issues left are who reports the taxable distribution if any, and how do you account for the 1099-Q you received that has Box 6 checked.

Based on what you said in your post, I'm guessing that the AQEE is less than the total distribution and some part is taxable. Using the formula that is in example 2 on page 56 of IRS Pub 970 you can compute the taxable amount and have your daughter report it on her 1040 Line 21 if she has a filing requirement for a dependent. See below for the filing requirement of a dependent.

As Box 6 of your 1099-Q is checked (this is the box that says that the distribution did not go to the designated beneficiary), in order to forestall any future correspondence from the IRS I would report the distribution from your 1099-Q on Line 21 as Other Income. I would then also report on Line 21 another item that is a negative value equal to the distribution and call it Qualified Higher Ed. Expense for Dependent Child.

Filing Requirement

She must file a return if any of the following apply. Her unearned income was more than $950. Her earned income was more than $5,950. Her gross income was more than the larger of $950 or her earned income (up to $5,650) plus $300. She owes some type of special tax. She has net earnings from self-employment of at least $400.

Reply to
Alan

Thank you. Turns out that even with the AOC, I took out less from the QTP such that there is no taxable gain.

Regarding my reporting on Line 21 since Box 6 is checked:

- Wouldn't Line 21 for me only be the earnings, not the gross distribution? I paid tax on the basis when I earned the income used to make the investment.

- How do I fill out multiple Line 21 entries? Or do I squeeze in both items in the small text box area requesting type and amount, and show zero dollar entry in the number column?

Regarding whether my daughter needs to file, she had about $2500 in gross income and no other income. One of her employers withheld Federal tax, so doesn't she need to file in order to get the withheld tax refunded? Doesn't she need to file to support her Federal Application for Student Aid (FAFSA)?

Reply to
Dimitrios Paskoudniakis

Just the earnings. My brain was thinking scratch pad for tax software for my record. Just enter 1099-Q and an amount of zero. She should file.

Reply to
Alan

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