1099-Q Rant

qualified educational expenses.

a 529 plan to my niece, and she graduated in 2011. A 1099-Q was issued which showed a loss on the investment. However, that loss was unusable by me since it was subject to the 2% rule.

me some additional funds. Since my niece had graduated in 2011, these funds could not be used for QEE's.

by me), but I also have to pay that 10% penalty; and I cannot use the loss that was stated on 2011's 1099-q to offset any of this.

A grey area. I think a case could be made that because the entity (the

Well, I did receive the 1099-Q -- and it's probably not worth fighting with the payor about the 1099-Q. I suppose I could make that argument with the IRS if/when they catch it.

Maybe you can file a form 8275 to disclose the position and report the amount on line 21. If the IRS rules against you, you pay the extra 10% and there won't be penalties or interest.

That is a thought. Thanks.

qualified educational expenses.

a 529 plan to my niece, and she graduated in 2011.  A 1099-Q was issued which showed a loss on the investment.  However, that loss was unusable by me since it was subject to the 2% rule.

me some additional funds.  Since my niece had graduated in 2011, these funds could not be used for QEE's.

by me), but I also have to pay that 10% penalty; and I cannot use the loss that was stated on 2011's 1099-q to offset any of this.

Were there, when your niece was a student, qualified expenditures that were not reimbursed by the plan and not used for other education credits or deductions? (Room and board come to mind as one are only qualified expenditures for 529 plans.) To the extent of such "unused" expenditures, in my opinion, you don't have a problem and don't even owe income tax. However, the money should be transferred to your neice unless she lived with you while in school or unless you paid the qualified expenses out of your own pocket.

Also in my opinion, if there are no such qualified expenditures, then you owe income tax and the penalty.

Note that qualified living expenses for a student living off-campus are computed by the educational institution and differ depending on whether the student is living at home or on her own.

Yes, there were. But not in 2012 as she graduated in 2011. Does that make a difference?

I sent her a check for the amount that had been sent to me. Does that count?

Thanks.

difference?

Nothing in IRC Section 529 requires that distributions be taken in the same year as the payment is made and so far the IRS hasn't issued any rulings that imposes such a ruling. That said, some tax advisers take the position that the rule exists anyway or that the taxpayer risks having the IRS impose the rule when auditing a tax return.

In general, I disagree with those tax advisers I mentioned above. I would be more aggressive in your specific circumstances since these funds weren't available for distribution in 2011. Again, there is nothing in official IRS rulings that addresses your specific situation.

You should talk this over with a local tax pro who has access to ALL the relevant information before deciding what to do.

Well, that statement provoked me to take a look at Publication 970 where I find the following:

.... Taxable earnings. Use the following steps to figure the taxable part.

Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year.

Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Form

I haven't looked at IRC 529, and I take your word for it that the requirement does not exist there. But I don't think it is going to be worth it to me (amount is very small), to take a position contrary to the IRS guidance in this instance. Thank you anyway for your thoughts.