<p>My D is a freshman. She received a standard tuition scholarship as well as a scholarship to cover room (not board). I'm aware that the room scholarship is considered taxable income. I was doing her taxes on TurboTax. At one point it asked me if she received a 1099-Q for distributions from a college 529 plan - she did. This is an account of ours (the parents) but she is the beneficiary. When I reviewed the taxes I noticed that the "earnings" from Box 2 on the 1099-Q was included in her income and she is required to pay taxes on that. I'm confused, I thought the whole of a 529 plan is that the income grows tax-free. We did claim her a dependent and qualified for the 2.5K tax credit.</p>
<p>Am I missing something? It is not a lot of money so I'd rather not go to an accountant for this.</p>
<p>… BTW, the tuition portion of the scholarship was not full so there were additional expenses making us eligible for the tax credit. </p>
<p>Generally:</p>
<p>Add up tuition, required fees, room, board and required expenses (usually books). This is Qualified Education Expenses for the purpose of 529 distributions.</p>
<p>Subtract the total of grants/scholarships that went to the above expenses. This is Adjusted Qualified Education Expenses for the purpose of 529 distributions.</p>
<p>If the amount of your 529 distributions exceeds the amount of Adjusted Qualified Education Expenses, you have excess 529 distributions. The earnings portion of any excess distribution will be treated as taxable income. I believe to the extent that the excess distribution is due to grants/scholarships received, the additional 10% penalty on the earnings portion of excess distributions is waived.</p>
<p>Another thought: to whom were the 529 distributions made payable? If it was to you (the parent), and you then paid the school or passed the funds on to your daughter so that she could pay the school, the 529 plan administrator may have made the assumption that the entire distribution was for a non-qualified purpose, and the 1099-Q reflects that erroneous assumption.</p>
<p>A minor correction to last post:
“Subtract the total of tax-free grants/scholarships that went to the above expenses. This is Adjusted Qualified Education Expenses for the purpose of 529 distributions.”</p>
<p>The main thing is you can’t get a double benefit for the same education expenses. You can’t use the same expenses to make scholarships/grants non-taxable, for the parent to take the AOC, to make the earnings portion of a 529 distribution tax-free, to take the savings bond education interest exclusion etc. Perhaps TT doesn’t think she has enough education expenses to take all the benefits you are trying to take, including the $2.5k AOC you took.</p>
<p>The education interview questions in tax software can be complex so be sure you are fully understanding each question. Click on any help available to better understand each question. Did TT ask on her return how much you took for the AOC on your return? Tax software does try to coordinate parent and student returns regarding the education topics.</p>