529 distributions

[gayhass]

Dependent taxpayer is the recipient and beneficiary of 2 1099-Q distributions and the total distributions exceed qualified education expenses by $1089.  Instructions state that the two distributions must be considered separately to determine taxability of earnings and penalty.  Calculations in the student info worksheet combine the two and produce taxable earnings of 598 with 0 subject to the penalty.  But the 5329 shows 598 plus 560 (1158) subject to the penalty with 598 exempted.  When I do the calculations separately for each plan distribution I come up with 502 taxable and 0 subject to the penalty.  Has anyone else encountered a problem with distributions from multiple accounts that include an excess?

[Terry53029]

You can use 529 distributions for college expenses that might not be used for education credit such as room and board. Remember that only the earnings are used to figure if you have a taxable amount or penalty. You say dependent tax payer, if your client is a dependent, the distribution would go on whoever is claiming them as a dependent.  

[rbynaker]

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@Terry53029 wrote:

the distribution would go on whoever is claiming them as a dependent.  

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Not necessarily.  The rules are quirky.  The 1099-Q is issued to the recipient of the funds.  The account owner (i.e. parent) can take the distribution and then write a check to the school.  Then the 1099-Q goes to mom/dad.  Or the money can go directly from the 529 plan to the school, in which case it is deemed to be paid to the beneficiary, so the student gets the 1099-Q.  Whomever is deemed to have received the funds also gets the taxable income (if any).

I think what a lot of people don't realize is that it's not too difficult to "room and board" the 1099-Q income away.  Or use a computer purchase.  As you mentioned, the definition of "qualified" is different for 529 distributions vs. education credits.

Rick

[gayhass]

Thanks. The dependent is the recipient of two distributions, one from parents and one from gtanparents. Parents estimates of expenses don’t room and board it away and the software does one calculation of taxability, not two as prescribed because of the two distributions. I am convinced that the penalty calculation is also incorrect so am filing this return on paper