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Author: TMFTaurean Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121146  
Subject: Reporting 529 distributions on taxes Date: 3/19/2008 8:42 PM
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(Originally posted over on the Paying For College board, and it was suggested that I cross post here, so here I am... :-)

We're going through the process of filing our taxes for the first time since our daughter entered college and having trouble on how to properly report 529 distributions. Here's our situation

- Daughter finishing up freshman year at college.
- Wife has had a 529 plan set up for while, which we contribute to regularly
- Daughter is named as beneficiary on the 529
- We are the non-custodial parents and do not claim her on taxes
- Took a small distribution from the 529 this year which was applied to tuition.
- When wife requested distribution, the check came to her, made out in her name which we then cashed and used to pay tuition
- Received a 1099-Q from 529 for distribution

We use Turbo Tax to prepare our taxes and while I somehow stumbled through the program and managed to get the 1099-Q data entered, it wants to treat is as a taxable event, with penalty for non-education withdrawal. I think the ultimate issue is that we're not able to claim DD as a depenedant, so I'm not able to tell TurboTax that the distribution was used to pay college expenses for our daughter.

So, I guess my questions are two-fold
- How to I properly account for all of this on this year's taxes?

- What is the best approach to managing the withdrawals from the 529 plan in the remaining years to make reporting the distributions as straightforward as possible?

Thanks!
Mark
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99593 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/19/2008 11:59 PM
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- Daughter is named as beneficiary on the 529

We use Turbo Tax to prepare our taxes and while I somehow stumbled through the program and managed to get the 1099-Q data entered


Did you happen to notice that it's your daughter's SSN on the 1099-Q? That's because a taxable distribution is income to her, not you.

Software strikes again. Go low-tech and see IRS Publication 970 about how distributions are handled. In the meantime, send your daughter the 1099-Q.

Phil

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Author: TMFTaurean Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99594 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 12:12 AM
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Did you happen to notice that it's your daughter's SSN on the 1099-Q? That's because a taxable distribution is income to her, not you.

Thanks Phil.

I checked the 1099-Q and it actually has my wife's SSN in the recipient's box. Also, box 6 (recipient is not the designated beneficiary) is checked.

In the meantime, send your daughter the 1099-Q.

Actually we do her taxes for her too :-)...and my wife's parents.

So, with that additional piece of information, what's the next step?

Mark

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99595 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 12:21 AM
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So, with that additional piece of information, what's the next step?

Think of those college days of your own. IOW, hit the books. In this case, Pub 970, which tells you how to determine the taxable portion, if any, of the distribution.

If there is a taxable distribution and TT doesn't give you a way to easily tell it how much, just force it onto line 21 of the 1040 and, if applicable, Part II of Form 5329.

Phil

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Author: TMFTaurean Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99598 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 7:55 AM
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If there is a taxable distribution and TT doesn't give you a way to easily tell it how much, just force it onto line 21 of the 1040 and, if applicable, Part II of Form 5329.

It's not that TT isn't calculating a taxable portion of the distribution, it is. But since the distribution *was* used to pay for tuition, it shouldn't be taxable at all, right?

Mark

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99599 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 9:14 AM
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It's not that TT isn't calculating a taxable portion of the distribution, it is. But since the distribution *was* used to pay for tuition, it shouldn't be taxable at all, right?

Not necessarily. There's no "tracing" of 529 distributions, so to figure if there's anything taxable you have to look at the student's total picture for the year. The process is explained in Pub 970.

Phil

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Author: TMFTaurean Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99603 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 11:58 AM
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Thanks Phil...I'll have a look at Pub 570.

From what you are saying though, even though the recipient SSN on the 1099-Q we received was listed as my wife's, it still needs to be reported on our daughter's return and not on ours?

Thanks again for the replies.

Mark

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 99604 of 121146
Subject: Re: Reporting 529 distributions on taxes Date: 3/20/2008 12:05 PM
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From what you are saying though, even though the recipient SSN on the 1099-Q we received was listed as my wife's, it still needs to be reported on our daughter's return and not on ours?

It's reported on a return only if there's a taxable distribution. If so, it goes on the beneficiary's return.

Phil

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