1099-Q distribution

[Catherine]

Client got a 1099-Q distribution from a Section 529 plan. Used $$ to pay for college-grad-son's music lessons (he got a teaching certificate and was taking an advanced course in techniques for teaching music in schools). No 1098-T from the school and not even sure if client knows the school's name. Son is no longer a dependent and lives far off in another state.

How do I treat this? Line 21 distribution, backed off by Line 21 expense? Education credits form 8863 to show no taxable distribution?

TIA,

Catherine

[cred65]

Is the 1099-Q in fathers name or son's name?

[Catherine]

Parent's name (mom's, actually, as she started the 529 plan back when son was small).

[cred65]

I just noticed that my client has received a 1099-Q that is in the Parents name (mother who is in the top tax bracket) and the 1099-T is in the child's name. Oh boy!!!

[Abby Normal]

You only have to report the part of the 1099Q that is taxable, if any.

[Jack from Ohio]

1099-Q distributions can be used for ANY educational expenses. If used for anything else, it becomes taxable with a penalty.

[Catherine]

Sounds to me like Line 21 addition with Line 21 back-out, then. Since there's no way to tag it to the no-longer-dependent son in any education expense related form. None of it is a taxable distribution; they got the tuition bill, and requested (and received) exactly that much in distribution.

Thanks!

[Jack from Ohio]

Only put on line 21, any taxable amount of the disbursement.

[Catherine]

OK -- I have usually put down full amount with a 2nd line backing it out again, to prevent the "hey, you didn't report this; you owe $$!" letters.

[cred65]

OK -- I have usually put down full amount with a 2nd line backing it out again, to prevent the "hey, you didn't report this; you owe $$!" letters.

Is box 6 checked? "If this box is checked the recipient is not the designated beneficiary"

I am not sure if that changes the reporting in any way, want to avoid CP2000.

[Catherine]

Yes, Box 6 is checked.

[joanmcq]

The beneficiary should be the one getting the distribution or it could be paid directly to the school. This would avoid all of these pesky mismatches.

[Catherine]

It would, but a lot of these plans are set up to send $$ directly to schools or to owners, not beneficiaries. So if some of the funds are for books... there you have it.

Also, I've heard tell of requests to pay schools that have NOT been answered in timely fashion. If the parent requests the money sent to them, there is at least a binary answer: they received the check, or not. None of this bursar's office says no - fund says yes and in the meantime the student can't register for classes! So I understand why parents may want funds sent to them.

[kcjenkins]

Yes, I agree with Cat, plus in some cases the parent knows if the money goes directly to the kid, some [or even all of it] may not go to the school bills. I, like Cat, usually put the full amount on Line 21, even if backing all of it out again. May not be required, but never got a CP2000 out of one done that way.

[Jack from Ohio]

Has anyone ever received a CP2000 for 1099-Q? 17 years, I have never seen one.

[joanmcq]

I've seen tons of them, from when I was doing audit rep for TT.

[HV Ken]

Has anyone ever received a CP2000 for 1099-Q? 17 years, I have never seen one.

We have seen some. They come when the amount of the gross distribution on the 1099-Q exceeds the tuition minus scholarships on the 1098-T and there are earnings on the 1099-Q - the default IRS assumption is that the earnings are taxable. We have to send in a detailed letter along with receipts showing the additional qualified education expenses to be factored into the equation for determining whether the earnings are indeed taxable. From the simple computer matching game, the IRS default assumption makes sense as they don't have the other information to factor in.

See Publication 970.