First time filing as independent, 1098-T and 1099-Q 529 withdrawal

[retire2020]

Posted on BH and posting here for more clarity..

My daughter is graduating from medical school this May and will soon start her residency in June. So far, for last nine years she was dependent on my tax return but will be filing her taxes as independent for the first time next year for the year 2024. I(Dad) am the account owner of 529 plan and she is the beneficiary so for the last nine years I had 529 withdrawal distributed to me. Then I received 1099-Q on my name which I filed along with her 1098-T on my tax return to show that withdrawal was used to pay her tuition and living expenses. I already paid her last semester tuition about a month ago(30K) and planning to withdraw same amount from 529 sometimes this year. What are my options?

- I tried mimicking the scenario in TT if I withdraw and have a check send out to me. If I do not have my daughter listed as dependent then TT will not allow me to enter 1098-T/1099-Q. How do I notify IRS that 1099-Q was indeed used to pay for her college education? I think not reporting 1099-Q will create a red flag to IRS, wouldn't it?

- Withdraw from 529 and have a check send out to my daughter. She'll then receive 1099-Q on her name and shall be able to file on her tax return along with her 1098-T. Also when she receives the check and she then writes check to me, would it trigger any gift tax issues? I have already paid her tuition from my account so can she just write a single check to me or split into two(me and my wife) to avoid gift tax issue if IRS looks at it this way?

- Which option from above you would choose or better in my case? I do not want to trigger any un-necessary audit problem from IRS

 

[38Chevy454]

I'm far from an expert at this, but I think number 1 is easiest. Think of grandparents that have a 529 for a grandkid, they are certainly not a dependent on the grandparent's return. Not sure how the exact process works, but my assumption is the grandparent gets the check and pays the school expense? It seems the 529 money should be independent of whoever the recipient kid is a dependent or claiming on their own. Just that the 529 money can be shown to be used for education expenses. Hopefully someone else with more expertise can chime in.

As for your option 2, there is no gift tax issue since your daughter's check is effectively paying back a loan you made on her behalf. She is not giving you money, she is reimbursing you.

 

[SecondCor521]

Posted on BH and posting here for more clarity..

My daughter is graduating from medical school this May and will soon start her residency in June. So far, for last nine years she was dependent on my tax return but will be filing her taxes as independent for the first time next year for the year 2024. I(Dad) am the account owner of 529 plan and she is the beneficiary so for the last nine years I had 529 withdrawal distributed to me. Then I received 1099-Q on my name which I filed along with her 1098-T on my tax return to show that withdrawal was used to pay her tuition and living expenses. I already paid her last semester tuition about a month ago(30K) and planning to withdraw same amount from 529 sometimes this year. What are my options?

- I tried mimicking the scenario in TT if I withdraw and have a check send out to me. If I do not have my daughter listed as dependent then TT will not allow me to enter 1098-T/1099-Q. How do I notify IRS that 1099-Q was indeed used to pay for her college education? I think not reporting 1099-Q will create a red flag to IRS, wouldn't it?

- Withdraw from 529 and have a check send out to my daughter. She'll then receive 1099-Q on her name and shall be able to file on her tax return along with her 1098-T. Also when she receives the check and she then writes check to me, would it trigger any gift tax issues? I have already paid her tuition from my account so can she just write a single check to me or split into two(me and my wife) to avoid gift tax issue if IRS looks at it this way?

- Which option from above you would choose or better in my case? I do not want to trigger any un-necessary audit problem from IRS

Qualified 529 withdrawals are not reported on tax returns - neither the parent nor the student.

You should save records, such as the 1098-T, or an itemized student account statement from the educational institution, or other applicable records to show that you have qualified educational expenses to match the 529 withdrawal. This would be in the unlikely event that the IRS asks about the 529 withdrawal.

You mentioned "living expenses". Living expenses are not qualified educational expenses for 529s unless they are room and board. And even then there are certain limitations that you should be careful to observe. See IRS Pub 970 chapter on QTPs for details.

Since you paid the tuition already from your own monies, it would be simplest to reimburse yourself from the 529. If for whatever reason you sent the check to your daughter and then had her pay it to you, as the other poster mentioned there is no gift tax issue because it's a reimbursement, not a gift.

I'd save the records mentioned above with whichever SSN appears on the 1099-Q that you receive next January (probably yours).

 

[njhowie]

- I tried mimicking the scenario in TT if I withdraw and have a check send out to me. If I do not have my daughter listed as dependent then TT will not allow me to enter 1098-T/1099-Q. How do I notify IRS that 1099-Q was indeed used to pay for her college education? I think not reporting 1099-Q will create a red flag to IRS, wouldn't it?

I go through this every year. Never a problem.

I just did it on the current TT and answering the questions in the 1099-Q section, again, no issues.

See attached.

 

[retire2020]

Thank you for the replies. I think I will have 529 distribution go to my daughter and let her file 1099-Q/1098-T. Also this way she can use LLC and save 2K on taxes.

When I mentioned living expenses I meant lodging and boarding only. Her total qualified expenses shall be around 41K as follow:

23K: Tuition and Fees
15K: Lodging/Boarding
3K: Books/Graduation fee

 

[cathy63]

Thank you for the replies. I think I will have 529 distribution go to my daughter and let her file 1099-Q/1098-T. Also this way she can use LLC and save 2K on taxes.

When I mentioned living expenses I meant lodging and boarding only. Her total qualified expenses shall be around 41K as follow:

23K: Tuition and Fees
15K: Lodging/Boarding
3K: Books/Graduation fee

The $15K Lodging/Boarding is not a qualified expense for claiming LLC. It is a qualified use of the 529 funds.

Books are a qualified expense for LLC only if they had to be purchased directly from the institution.

Any part of the tuition that was covered by the 529 distribution is not a qualified expense for LLC.

 

[retire2020]

The $15K Lodging/Boarding is not a qualified expense for claiming LLC. It is a qualified use of the 529 funds.

Books are a qualified expense for LLC only if they had to be purchased directly from the institution.

Any part of the tuition that was covered by the 529 distribution is not a qualified expense for LLC.

Thanks cathy63. Good to know. Wouldn't this work if I save documentation for the expenses as follow?

15K for lodging and Boarding, 3K for books and 12K for tuition was used for 1099-Q(30K withdrawal from 529).

That will then leave me 11K for tuition which should satisfy LLC requirement.

 

[cathy63]

Yes, that would work.

 

[retire2020]

Yes, that would work.

Thank you so much for confirming!

 

[SecondCor521]

Also, the $15K in room and board cannot exceed the R&B COA for the school for the academic period and living arrangement of the student. The financial aid office should be able to get you the proper number.

(To the extent it does exceed the COA, it's a non-qualified distribution from the 529.)

Offhand, I think the student also has to be at least half-time as defined by the school; it sounds like OP's student probably met this criteria.

 

[retire2020]

Yes. I have that info from her medical school and her lodging/boarding amount is < their published numbers. Med school is VERY expensive and her total cost of attendance is close to 85K/year. Even though I helped pay for most of her 10 years of studies(PharmD/MD) she will still graduate with 200K student loan debt. Yikes!

 

[SecondCor521]

Yes. I have that info from her medical school and her lodging/boarding amount is < their published numbers. Med school is VERY expensive and her total cost of attendance is close to 85K/year. Even though I helped pay for most of her 10 years of studies(PharmD/MD) she will still graduate with 200K student loan debt. Yikes!

Indeed, but that's quite an accomplishment. Good for her, and congratulations to everybody for getting to the finish line!