529 Account distributions and completing tax forms

swimcatsmom
Tue, 15 Jan 2008 18:36:53 +0000

Well I did some googling and the tax program I use actually has this explanation on line (wish it explained it as well in the actual program as I was quite confused)

from
[Form 1099Q](http://turbotax.intuit.com/tax-tools/form_1099q/article)



I withdrew funds from a 529 plan to pay my daughter’s college tuition. I received a 1099-Q form reporting the distribution. Do I owe tax on this money?

The tax system has trained us – like Pavlov’s dog – to see a 1099 form and instinctively think that it is reporting income. That’s not so with Form 1099-Q. Its purpose is merely to remind you – and alert the IRS – that you made a withdrawal from a 529 college savings plan, state prepaid tuition program, or Coverdell education savings account. The distribution that is reported in box 1 of the 1099-Q is tax-free if you used the money to pay tuition and related fees, books, and room and board. Most payouts are used for these expenses. If you use the funds for other purposes, then only the earnings portion of the distribution is taxable. That amount is listed in box 2 of the 1099-Q and should be reported by you as “other income” on line 21 of the 1040 form you file for the year of the distribution. The taxable portion also is subject to a 10 percent penalty tax that is calculated on Form 5329.

So why is the distribution reported to you and the IRS if the vast majority of withdrawals are going to escape tax? We think the 1099-Q’s main purpose is to alert an IRS agent to the distribution in the event you are audited. The agent can then ask how the funds were used and determine if you reported the distribution as necessary.



There is no where on the tax forms to show it as income then deduct the part that is not taxable. So I guess we just do not show it. Heart attack over for now I think.