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Early distributions from a 403b for tuition and how to treat monthly. payments to the university

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Level 2

Client took two early distributions of $12700 (Code 1) and $194 (Code 1B) from a 403b to pay for son's tuition 2019-20 school year. They are paying $1580/mo (10 month payment arrangement) starting in 8/2019. The 1098T from the University they shows $26978 in Box 1, and $14750 in box 5. 

1) What amount should be shown for education credit - actual amount they paid toward tuition (5x 1580= 7900) or the full amount of $15800 or Box 1 - Box 5 (26978-14750=12228?

2) Since the distribution from 503b was for tuition (federal and state taxes were withheld), is the distribution fully taxable as shown in box 2a?

Thanks in advance--this is my first time encountering this discrepancy.

 

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Level 15

1) The 1098T is just showing the tuition. For tuition I would use the difference 26978-14750=12228. Add in other deductible education expense to get your appropriate Education Expense total.  https://www.irs.gov/pub/irs-pdf/p970.pdf may come in handy. 

2) The distribution code 1 is totally taxable. That is what allows you to take the education credit and not have it be double dipping. The amount spent on education is NOT subject to the early distribution penalty, IF IT WERE AN IRA. Since it is a 403b it is subject to the 10% penalty https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri... that will show up on IRS 5329 and probably some state form.  The 1B is from a Roth and is likely not taxable, but you would need to determine the Roth basis.  https://www.irs.gov/pub/irs-pdf/p575.pdf may come in handy.

Sounds like a typical WHY DID YOU WAIT SO LONG TO SEE ME moment. 


ex-AllStar

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Highlighted
Level 15

1) The 1098T is just showing the tuition. For tuition I would use the difference 26978-14750=12228. Add in other deductible education expense to get your appropriate Education Expense total.  https://www.irs.gov/pub/irs-pdf/p970.pdf may come in handy. 

2) The distribution code 1 is totally taxable. That is what allows you to take the education credit and not have it be double dipping. The amount spent on education is NOT subject to the early distribution penalty, IF IT WERE AN IRA. Since it is a 403b it is subject to the 10% penalty https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri... that will show up on IRS 5329 and probably some state form.  The 1B is from a Roth and is likely not taxable, but you would need to determine the Roth basis.  https://www.irs.gov/pub/irs-pdf/p575.pdf may come in handy.

Sounds like a typical WHY DID YOU WAIT SO LONG TO SEE ME moment. 


ex-AllStar

View solution in original post

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Level 2

Thanks George--I appreciate it--especially your closing line. It is as I thought--about the 403B

Andy

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