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Glitch on Turbo Tax affecting 529’s

TheGreyKingTheGreyKing Forum Champion Williams College Posts: 1,967 Forum Champion
My spouse was doing our taxes when my spouse noticed the 529 was being treated as taxable income. My spouse searched for a solution on the Turbo Tax website, and discovered this message, which I am sharing here as I imagine that many parents with 529’s for their children will encounter the same problem we did. It tells the steps you need to take to ensure that the money is not taxed by glitch:

“Turbo Tax’s Education Optimizer doesn’t support distributions from Section 529 Qualified Tuition Plans (QTP) reported on Form 1099-Q. As a result, part or all of the distribution is incorrectly treated as taxable income.

....Here’s how to work around this limitation:
1. Go back to the beginning of the Education section in the Deductions & Credits section.
2. Select Revisit next to Expenses and Scholarships (Form 1098-T).
3. On Your Education Expenses Summary screen, select Edit next to Education Information.
4. Answer the questions until you reach the screen Amount Used to Calculate Education Deduction or Credit.
5. On this screen, change the amount to $0 if you’re not eligible for any education credits. If you are eligible, subtract your 1099-Q distribution from your education expenses and enter the difference.
6. Select Continue and your program will correct the calculation.”

In step #5, my spouse put $0, and then the problem was corrected and we were not taxed for the 529 amount.

Replies to: Glitch on Turbo Tax affecting 529’s

  • SwimmingDadSwimmingDad Registered User Posts: 891 Member
    Thanks for posting this. I'll have to take a look. We are getting absolutely hammered on taxes this year. #Unhappy
  • donnaleighgdonnaleighg Registered User Posts: 1,533 Senior Member
    This has been a problem for YEARS. Somehow they can't figure out how to fix it.
  • CounselmomCounselmom Registered User Posts: 27 Junior Member
    Thank you. First time with college expenses and thought we were entering something improperly.
  • mommdcmommdc Registered User Posts: 10,982 Senior Member
    I thought you didn't even have to enter the information on the 1099 Q unless the 529 distribution was taxable?

    Also, why would you enter 1098 T information (education expenses) if you don't qualify for education credit?
  • TheGreyKingTheGreyKing Forum Champion Williams College Posts: 1,967 Forum Champion
    Because it is a glitch in Turbo Tax and that is what you need to do. Enter $0. That is why I posted the steps here- to save other people the same confusion we faced.
  • donnaleighgdonnaleighg Registered User Posts: 1,533 Senior Member
    edited March 15
    after the first year when I noticed this, (and went back and did the $0 thing) I just quit putting anything in related to 529 distributions (since I knew we didn't qualify for the credit, and I knew our 529 distributions were qualified). But I will say that this has been a bug since my oldest was a freshman. She's now 4 years out of college.

    The issue is that if you just follow the Turbotax instructions on "following the flowchart" you absolutely run into this problem.
  • colfac92colfac92 Registered User Posts: 335 Member
    I wonder if this is a function of what version, and on what platform, you are running the software. None of the steps outlined match my experience using TurboTax Deluxe 2018 for Mac.

    Or maybe it is a function of who is listed as the recipient of the distribution from the 529 account? We have the funds sent directly to the institution, so our son (the beneficiary of the account) is listed as the recipient... (?)

    Anyway, I have not had this problem.
  • donnaleighgdonnaleighg Registered User Posts: 1,533 Senior Member
  • colfac92colfac92 Registered User Posts: 335 Member
    edited March 16
    OK, I see now
    This typically happens on returns where qualified education expenses are entered (usually from a 1098-T) but the income level is too high to qualify for the American Opportunity or Lifetime Learning Credit.

    Our income is such that we DO qualify for the credits, so I guess this glitch isn't something I would encounter...
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