My client has 3 children in college, all who have received distributions from a Sec 529, as reported on the 1099-Q.
We have input the tuition expenses from all 3 1098-Ts, as well as books and room/board expenses.
The client is not receiving any educational tax credits due to income phaseout. One student received a scholarship amount.
Schedule 1 LIne 8 of Pro-Series is showing $22K in taxable income. In addition, Form 5329 is showing $13K in non-qualified expenses subject to the 10% penalty.
I don't buy this. This is not consistent with the Tax Code. Total earnings (not distr's) from all 3 1099-Qs = $36K. Total education expenses net of scholarships for all 3 kids = $26K.
To me it seems as if only $10K should be taxable, with NONE subject to the 10% penalty.
This can't be right! Am I entering something wrong? Is the software not calculating correctly? I'm not sending out this return with these numbers!
You’re correct. It’s certainly sounds wrong and you’re probably entering something(s) incorrectly.
if I’m reading this correctly there should be no impact on the tax from the 529s or education credits. If so, delete all the education info... start with the 1098ts and dependent worksheets that you have the correct result. Then work on the Qs...keep an eye on the refund monitor to see the entry(s) that are giving you trouble.
I don't think you can aggregate, you have to look at each dependent separately. Maybe that's where your discrepancy is coming from.
I realized that I was only considering Earnings and not the whole Distribution. According to the tax code, the whole distribution is potentially taxable if there are not enough QHEE's to absorb it all. I think that's flaky; the cost-basis part of the distribution was already taxed when it was contributed. Anyway, my solution was to override the numbers to make them what I thought they should be. Not the best idea, I know, but it did get the taxable part down to a more reasonable level.
I know that 529 plans can be transferred to other family members pretty freely, so I thought aggregating was acceptable. Anyway, I got the numbers to work out to what I manually calculated. If the IRS disputes it, well, I'll find out in time.