1099Q, 1098T, and possibilities

Paying for College
1

<p>A neighbor asked if this was possible and I was stumped:</p>

<p>Has a 1099Q with a distribution of about $23,000. Of that amount, about $2,000 are earnings. Has a 1098T with $12,000 of qualified tuition and fees. Room and Board would be about $10,000 and books maybe another $1,000.</p>

<p>So the entire 1099Q would go to higher education expenses. Got that.</p>

<p>But what if they were to take the entire distribution and NOT use it for education? Only $2,000 of it would be taxable. Is it possible to do that and then use the qualified tuition for an education credit?</p>

<p>My gut feeling is no, but I certainly can't find anything in writing that says so.</p>

<p>Seems like everybody should do that then. It is much better to pay tax on the earnings and then use the tuition for a $2,500 credit.</p>

2

<p>What is the 1099Q distribution from? There may be a tax penalty if it’s not used for qualified ed expenses.</p>

3

<p>It would still be cheaper to pay the tax on the $2,000 of earnings and the 10% penalty than to forgo the $2,500 AOC.</p>

4

<p>Really? 10% penalty could apply to the entire $23K…would the tax on the $2K earnings be $200 or less? Guess it depends on marginal tax rate but seems low. For me, it would be too much headache to save so little, but that’s just me…sick of reading IRS regs!</p>

5

<p>The penalty is only on the earnings.</p>

6

<p>Oh, is this a 529? I can never keep these 1099’s straight! In that case, I would figure it out both ways and use the resulting in a lower tax. You aren’t required to do one or the other, afaik, you just can’t double dip.</p>

<p>Maybe swimcatsmom will chime in here…I swear she’s memorized Pub 970!</p>

7

<p>Yes. I hope swimcastsmom chimes in soon.</p>

<p>It just doesn’t make much sense to me that you can take withdrawals from your 529 plan with very little consequence.</p>