What Do You Do With Form 1098-T and 1099-Q?
Form 1098-T is a tuition statement that students receive from their college. It serves two primary purposes:
Documenting eligibility to claim the American Opportunity Tax Credit or Lifetime Learning Credit
Documenting that the student was enrolled in a college and that 529 withdrawals up to net cost of attendance are therefore qualified
Form 1098-T isn't filed with your taxes; instead, you use the information to file and then keep it for your records. One important point about form 1098-T: it only shows tuition net of scholarships. Both education tax credits and 529 withdrawals have additional qualified expenses that need to be added to amounts on the 1098-T for tax filing purposes.
The AOTC includes books and supplies, regardless of where they are purchased, among qualified expenses. These need to be added to the family's qualified expenses, and receipts should be kept in the event of an audit. The AOTC is claimed using Form 8863.
In addition, your 1098-T might show amounts paid during the calendar year or amounts billed. Either way, the AOTC only allows expenses paid during the calendar year to be used for that calendar year's credit. For example, if you paid tuition for winter quarter of 2022 in December, 2021, you can only claim that payment for your 2021 AOTC. (Your 1098-T will have Box 7 checked if it includes amounts invoiced in December for the following calendar year's academic term.)
Unfortunately, many tax prep software programs only ask you to enter amounts from your 1098-T, not all qualified higher education expenses, and will calculate taxes and penalties when you enter 529 withdrawals in excess of the 1098-T amount entered, and tell you you're not eligible for the AOTC due to 529 withdrawals in excess of qualified expenses. In fact, the IRS' instructions for Form 8863 ask you to calculate your Qualified Higher Education Expenses and enter that amount, not the amount shown on your 1098-T, and only asks you to check a box indicating whether or not you received a 1098-T and whether Box 7 was checked on the 1098-T. So regardless of what the software says, enter the full amount of qualified expenses paid in the calendar year, not what's on the 1098-T.
Form 1099-Q is a statement showing distributions from your 529. It only shows the total distribution amount and the amount of basis (your contributions) and the amount of earnings (how much the account grew). Amounts on Form 1099-Q only need to be reported if the distributions were non-qualified, which means they were spent on something other than tuition, fees, room and board and required expenses. That means that most people do not need to report their 529 distributions on their tax return.
Nonqualified distributions are reported on the tax return of the person who received the 1099-Q. The earnings portion of the nonqualified distribution is taxable at that person's marginal tax rate plus the 10% penalty. Distributions that go directly to the school or to the student will have the student's SSN and thus be reported on the student's return if nonqualified; distributions going to the parent (or other account owner) will have that person's SSN and therefore be reported on their tax return if nonqualified. To calculate the taxable amount, you need to determine the ratio of earnings to basis in the distribution and then apply that ratio to the nonqualified amount. For example, if your total withdrawal is $10,000 (Box 1 of 1099-Q), the earnings is $3,000 (Box 2) and the basis (contributions) is $7,000 (Box 3), then 30% of your withdrawal is earnings. Multiply 30% times the non-qualified amount and that is the portion subject to taxes and the 10% penalty.
Pro tip: Having 529 distributions go to the student, not the parent, offers several huge benefits. First, the 1098-T and the 1099-Q will have the same Social Security number, meaning the IRS' computers will look at both and determine there's no need to look further. Second, any nonqualified portion is taxed to the person who received the distribution, and your student is likely in a lower tax bracket than are you.
