From my understanding, the amounts never match on the 1098-T and 1099-Q (the form generated from a 529 fund manager showing distributions). That’s because 1098-T can show what was billed or what was paid; and they often don’t account for R&B; and they certainly couldn’t account for books and supplies, which are QEE for using 529 funds. Schools won’t know what you paid for those QEEs.
However, I’ve been reading quite a bit that this very common mismatch causes an auto-generated letter claiming you have non-qualified distributions. In many cases, I’ve read that you send a simple letter back outlining QEEs, with receipts if needed, to show that your distributions did not exceed QEEs . And that’s all it takes, though it’s all stressful and annoying. So now I’m just wondering if I should just come to expect this every year for the next umpteen years that I will be withdrawing funds from our 529.
• For 2018, I made two withdrawals from the 529. One withdrawal went to DS (beneficiary). One went to the school directly for R&B and fees. The 1099-Q should be sent to DS, not to me.
• I have not yet seen a 1098-T yet for 2018 but assume those numbers and the numbers on the 1099-Q will not match, because one of the withdrawals I took was for his computer.
• All 529 funds were used for QEEs.
• Therefore, my understanding is we wouldn’t report any non-qualified income on our return or on DS’ return.
Knowing the above, I’m interested to hear if anyone has encountered one of these dreaded letters from the IRS even though their 529 withdrawals are qualified. If so, how long after you filed did you hear from them and was it easy to resolve?
Correct, unless there’s some kind of amazing alignment of the planets.
Correct again, but please note:
-Starting in tax year 2018, the 1098-T will only report what was actually paid to the school (reporting amount billed is no longer an option) for QEE.
-The QEE used for the 1098-T is based on the IRS definition for that term as used for tax credits, while the QEE on the 1099-Q is based on the IRS definition for that term as used for 529 plans; therefore the QEE as reported on a 1098-T will never account for R&B, even though that expense is a QEE for 529 money (given the right conditions).
My experience is that receiving the IRS CP2000 notice can be hit or miss, so you shouldn’t necessarily expect it this year or any year.
Yes, the 1099-Q will have your son’s name and SSN on it.
Yup.
Correct
Yes; one so far.
Tax return for 2015 was filed in February, 2016; the IRS CP2000 notice was received in August 2017. It was easy to resolve but a bit stressful, until I learned how common this thing is. Then I was just annoyed and shaking my head at how much time and money is wasted (on the part of both the government and many taxpayers) on stuff like this.
None of the 8 (soon to be 10) 1098-T forms I received were correct (all before this new rule that only amounts paid be included, so might be closer for this last 1098-T for one daughter). None included any outside funds received or spent (scholarships, books). I always kept an accounting on a copy of the school bill and have those should either daughter or I be audited or receive a letter.
Although the IRS might question the 1099Q, I don’t think they expect it to match the 1098-T, and that wouldn’t be the basis of the inquiry letter.
Also, your 1098-T might be online, in the student portal. I received a copy in the mail the first year or so, but since then they were only online.
I don’t know the specific basis of the CP2000 notice, but it’s got to be computer generated. My guess is it has to do with how big the delta is between the QEE reported as billed (formerly) or paid (now) on the 1098-T and the 529 distributions reported on the 1099-Q. If the delta exceeds a certain value, the computer sends a notice (again, my guess).
As I said, the 1098-T will never report amounts paid (or in past years, billed) for R&B. It will generally show amounts paid ((or in past years, billed) for tuition and certain fees that are QEE for the education tax credits. See IRS pub 970 sections on the AOTC and LLC.
Okay, just learned our school doesn’t report R&B on the 1098-T. Since we have a tuition waiver, I’m wondering if our 1098-T will show a very small amount or no amount. By contrast, my 529 withdrawals on our 1099Q will look quite large – even though they were used for qualifying expenses. (R&B, fees, books, supplies). No idea if this triggers a further look or has no bearing at all. Also, we’re not applying for any education credits nor will we have any itemized education expenses to deduct. Don’t know if this helps or hurts my case. Either way, I’m keeping ridiculously detailed notes, ledgers and receipts for every dime spent on QEEs.
Got it. I misread your earlier comment! Well, then my delta is going to be pretty big. 1098-T will show not much of anything. 1099-Q will show about $6500 withdrawn for R&B and supplies.
Although if I’m not claiming any education credits, maybe it won’t matter? Who knows. I’m with you, though, in terms of the annoyance factor. If they send a notice inquiring about our 529 funds and whether they were qualified, I’ve got everything I need to address it. That fear factor and the potential stress is there (which is why I’m posting), but it also makes me angry. That is my hard-earned money I’ve contributed to a 529 for 18 years and now I’m using it for its legally intended and qualified purpose. They should really get their act together and add something to these new forms or a schedule to be able to show total QEE compared to what the 1099Q reports.
I don’t know if this is still true, but schools didn’t have to issue 1098-T forms if the amount in the tuition box was less than the amount in the scholarship box. This was the case for my daughter when her scholarships exceeded her QEE, but they did put them online after her sophomore year.
If you have a tuition waiver, I assume the amount would appear in neither box (since it is not a scholarship but just ‘tuition’ that never was charged). The charged fees would appear in one box, and it might be more than the amount in the ‘paid’ box. Both small numbers.
Starting in tax year 2018, schools will no longer be allowed to put anything in the “amounts billed” box (box 2). In fact, that box will be grayed out.
Will be an interesting tax year! Well, at least I appeared to bypass another potential “flag” by having the funds released directly to the school or directly to the beneficiary. I’ve read that if the box is checked that says funds went to someone other than the beneficiary, another flag is thrown onto the field. The scary part about all of this is that, hands down, BelknapPoint and others on here are by far more knowledgeable than my own CPA and financial planner. They have both basically given no real advice other than ensuring I’m keeping receipts and using them for QEE.
Very true, allyphone. I think, though, I would have liked to have heard from at least one of them about the upsides/downsides of having funds disbursed to the owner (me) versus the school or the beneficiary. Seems like funds going to the owner can cause the IRS computers to flag the return. I’m really not sure if that’s true or why. This is a much more complicated topic than I imagined it would be. I’ve immersed myself in knowledge and still don’t feel like I have my arms around it fully. For example, I’ve gotten conflicting info about R&B:
A: CPA says use COA figures for amount allowed on R&B for EITHER on campus or off campus.
B: Other websites say COA figures for R&B need to be used when the student is at least half-time and off campus. Otherwise if at least half-time and ON campus, you can use the greater of COA figures OR (and this is key) what you’re actually billed directly from the university.
This is important to me to understand because there are of course varying levels of R&B depending on what dorm room and what meal plan. My son’s school’s COA figures cut right down the middle of those. FOr his first semester, he had a standard room and a higher meal plan, so theoretically, his R&B expenses exceeded the allowable COA figures for the school. That should be a non-issue if you follow interpretation “B” above. (Plus, I have plenty of other QEEs that I paid out of non-529 funds for to cover the difference.) So, it’s a bit of a head spinner and I want to ensure I’m doing this correctly. My son will be off campus in a few years. He’ll be studying abroad. He’ll go tot grad school. And I have another child coming up on college in a few years too. He has a 529 as well. Sigghhh
You could probably save yourself a lot of angst if you went right to an easily available authoritative source. Here’s what the IRS says about room and board as a QEE for 529 distributions:
*Qualified Higher Education Expenses
These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.
Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).
The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the school.
You may need to contact the eligible educational institution for qualified room and board costs.
*
This is from pg. 51 of IRS pub 970, linked above. Stop guessing and fretting. Read the applicable sections of the pub.
@BelknapPoint , yep – you’re right. I’m starting to get very cozy with these IRS pubs. I THINK I have my brain wrapped around it now but would sure appreciate confirmation that my logic is correct for 2018:
• DS had a $1750 taxable scholarship (used for R&B)
• 529 funds were used on QEEs, which includes R&B, fees, supplies, books.
• QEEs exceeded 529 disbursements. Therefore, there should be no taxable earnings to report. (I have a spreadsheet and receipts in case I’m asked for proof.)
• Further, 529 disbursements went to DS or the school directly. Therefore, I’m hoping to avoid the auto-generated notices when the “disbursements went to someone other than the beneficiary” box is checked on the 1099-Q.
• 1098-T will not list R&B. I checked on this. I assume it will list the $1750 scholarship.
• DS has a tuition waiver so all QEEs go to R&B, fees, supplies, books.
Based on the above points, I think this is what needs to happen on our returns:
• Taxable scholarship is reported on DS’ return (or ours? – not sure).
• DS also has earned income from a job of about $1600. Between his scholarship and earned income, he should have no tax liability on the scholarship this year.
• DS will be claimed as a dependent by us since we provide more than half of his support.
• Nothing should be reported on our return or his in terms of taxable earnings from 529 distributions, because QEEs exceeded disbursements.
I’m hoping I’m on target here. My two big questions:
Does the taxable scholarship go on his return or ours? We will claim him as a dependent.
If there WERE taxable earnings from the 529 to report, would it go on his return or ours?
The scholarship is his income and goes on his return.
Taxable earnings from a 529 go on the return of the person who took the nonqualified distribution. That’s where the “disbursements went to someone other than the beneficiary” box comes into play.
You didn’t ask, but the test for qualified dependents hasn’t included “provides more than half of his support” in several years. The support test is whether he provided more than half of his own support. (There are also other tests to be passed.)
@allyphoe – that’s very interesting about the support test. Whether he provided more than half his support: Well, he lives on campus and I pay for the R&B, less his scholarship which provides for about 30% of the total cost of his R&B each semester. I pay for his health insurance, his car, his car insurance. Technically (I think), we pay for his tuition by way of employee benefits since it’s a waiver. We pay for his books, supplies and fees. He comes home during breaks and stays at our/his house rent free. I pay for his food. He pays for incidentals (movies, restaurants) using money he saved from jobs. So it seems like we can claim him as a dependent. Did the dependency criteria change with the new tax law changes?
The support test for qualifying children changed for 2005 returns, when the Working Families Tax Relief Act of 2004 standardized the definition of a qualifying child.
If you provided more than half of his support, then by definition he didn’t provide more than half of his own support, so assuming that initial statement was correct, you get the same answer both ways. It’s also not clear to me how he could have possibly provided more than half of his own support on $1,600 of wages! Neither scholarship funds nor tuition waivers are considered to be support provided by anyone.
I have always had the 529 distributions come to myself (the parent). I received the dreaded letter twice so far, once for each of my children that are in college. One just graduated, the other is a sophomore. Sure, I was stressed the first time because I didn’t know how common they are. I expect I’ll get on again (maybe it’s once per child) and I have no fear of it at this time.
If someone else does the return, using funds for QEE and keeping receipts really is all you need to do.