If you're paying for school expenses from a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q, which reports the total withdrawals you made during the year.
Introduction
If you contribute money to a qualified tuition program, such as a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q in each year you make withdrawals to pay school expenses of the beneficiary. The 1099-Q reports the total of all withdrawals you make during the year; however, some of this amount may be taxable depending on how you spend the money.
Coverdell ESAs and 529 plans
A Coverdell ESA and 529 plan operate in a similar fashion and provide the same type of tax savings. Essentially, these are accounts that are set aside to pay the school expenses of the beneficiary. The plans have some key differences in what educational expenses they cover but their tax treatment is essentially the same: you invest money on behalf of a student (which can be yourself), the investment profits are tax-free and distributions that go to pay qualifying educational expenses are not subject to income tax.
Form 1099-Q information
Form 1099-Q comes from the administrator or bank that manages your 529 plan or Coverdell ESA. If you set up the account and make contributions to it, then you are the owner and are the recipient of the 1099-Q. If you create one of the accounts to put someone other than yourself through school, that student has no control over the funds and is not responsible for any of the tax consequences.
The 1099-Q provides three key pieces of information. Box 1 reports your annual distributions or withdrawals from the account. The second box reports the portion of the distribution that represents the income or earnings of your initial investment. Finally, box 3 reports your basis in the distribution. Essentially, this is the amount of your distribution that relates to original contributions you make to the account.
The form also includes information on the type of account you own and amounts, if any, that you transfer between two qualified tuition plans.
Calculating taxable amount
If the distribution doesn’t exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. When you pay a student’s school expenses with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.
When you will receive 1099-Q
The administrator of your qualified tuition plans must send you the Form 1099-Q in any year you take a distribution or transfer funds between accounts. You should receive the 1099-Q no later than early February following the close of the tax year since the administrator must send it by January 31. Administrators must also provide a copy of each form to the IRS no later than March 31 if sent electronically, or February 28 if using a paper copy.
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FAQs
If you contribute money to a qualified tuition program, such as a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q in each year you make withdrawals to pay school expenses of the beneficiary.
How does a 1099-Q affect your taxes? ›
Form 1099-Q is filled out to determine if you owe any taxes on distributions from a Coverdell education savings account (ESA) or a 529 plan. If the form indicates that you do not owe any taxes, then you do not need to report this on your tax return.
How do I calculate the taxable amount of 1099-Q? ›
How are taxable earnings determined?
- TaxAct divides the AQEE by total distributions.
- The ratio determined in Step 1 is multiplied by total distributed earnings. The result is the amount of tax-free earnings.
- The tax-free earnings determined in Step 2 are subtracted from the total distributed earnings.
If you received a 1099-Q with an amount listed in Box 1, you can report the distribution in two ways: If you received a 1099-Q distribution and used it to pay qualified education expenses, you can exclude the 1099-Q income. Enter the Gross Distribution, Earnings and Qualified Expenses here to exclude the income.
How do you calculate adjusted qualified education expenses? ›
To calculate total qualified education expenses, add up all qualifying expenses incurred in the tax year. Use the information on Form 1098-T, if received, and consider additional expenses like books and supplies. Subtract any amounts in Box 5 of Form 1098-T from Box 1 to determine the total.
Does 1099-Q count as earned income? ›
If the distribution doesn't exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return.
Do I owe taxes on 1099-Q? ›
When the beneficiary enrolls in school and starts taking distributions to pay school expenses, the account manager will begin sending Form 1099-Q each year. And as long as the distributions are used to pay only qualified education expenses, the recipient doesn't pay income tax on the distributions.
Does 1099-Q get reported on parent's return? ›
Whoever the 1099-Q is issued to must report that 1099-Q on their tax return. In other words, the person whose SSN is on the 1099-Q should report the form – it could be the beneficiary student or the account owner, who may be a parent or other relative.
Why am I being taxed on 529 distribution? ›
If funds are withdrawn for a purpose other than qualified higher education expenses, the earnings portion of the withdrawal is subject to federal and state taxes plus a 10% additional federal tax on earnings (known as the “Additional Tax”).
Do I need receipts for 529 expenses? ›
529 recordkeeping
This is why it's important to keep good records (receipts and supporting documentation) that reconcile the total withdrawals that the 1099-Q reports to the IRS with the total that was spent on qualified educational expenses.
If you know none of it is taxable, it's best to just not enter the 1099-Q or educational expenses. The 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.
Do you report 529 withdrawals on taxes? ›
Withdrawals from 529 plans are not taxed at the federal level—as long as you understand and follow all the rules for qualifying expenses. You'll have to report your 529 plan spending to the IRS, so keeping careful records is important. Decide ahead of time how you'll withdraw the funds and use them.
Who pays taxes on 529 distributions? ›
The earnings portion of a Non-Qualified Distribution is taxable to the individual who receives the payment, either the Account Owner or the Designated Beneficiary.
How do I get the full $2500 American Opportunity credit? ›
To be eligible for AOTC, the student must:
- Be pursuing a degree or other recognized education credential.
- Be enrolled at least half time for at least one academic period* beginning in the tax year.
- Not have finished the first four years of higher education at the beginning of the tax year.
Tuition and fees. Room and board. Books, supplies, and equipment. Other necessary expenses (such as transportation)
How much can I claim for qualified education expenses? ›
You can claim 20% of the first $10,000 you paid toward 2023 tuition and fees, for a maximum of $2,000 each year. Course supplies, living expenses and transportation costs are not qualified expenses for the Lifetime Learning Credit.
Do you have to report 529 withdrawal on tax return? ›
Withdrawals from 529 plans are not taxed at the federal level—as long as you understand and follow all the rules for qualifying expenses. You'll have to report your 529 plan spending to the IRS, so keeping careful records is important. Decide ahead of time how you'll withdraw the funds and use them.
Will the IRS catch a missing 1099-Q? ›
Will the IRS catch a missing 1099? The IRS knows about any income that gets reported on a 1099, even if you forgot to include it on your tax return. This is because a business that sends you a Form 1099 also reports the information to the IRS.
