A taxpayer will receive Form 1099-Q if they received a distribution from a qualified tuition program (QTP) under section 529 or a Coverdell education savings account (CESA). It's up to the taxpayer to determine if any of the distribution is taxable. If the taxpayer used all of the funds distributed for qualified education expenses, nothing needs to be reported on their federal income tax return.
Gross distributions from a 529 or a Coverdell ESA reported in Box 1 include both earnings (reported in box 2) and basis (reported in box 3). The distribution is normally not taxable if it was used to pay for qualified education expenses, if it was transferred between trustees, or if it was rolled over into another qualified program within 60 days. Otherwise the excess distribution may have to be included in Other Income on Form 1040, and there may also be an additional tax on the amount included in income, reported on Form 5329.
Form 1099-Q Box 6 Distribution Codes (if reported)
|1||Distributions||Distributions (including transfers) to the recipient and any direct payments to a qualified educational facility. (Note: A withdrawal indicated with code 2 or 3 is not considered a distribution.)|
|2||Excess contributions plus earnings taxable in the current year||Withdrawals of excess CESA contributions and earnings, with the earnings taxable in the same year.|
|3||Excess contributions plus earnings taxable in the prior year||Withdrawals of excess CESA contributions and earnings, with the earnings taxable in the prior year.|
|4||Disability||Distributions made after the recipient was disabled.|
|5||Death||Payments to a decedent's beneficiary, including an estate.|
|6||Prohibited transaction||Prohibited transactions. (See sections 408(e)(2) and 408(e)(4) for similar rules that apply to a CESA.)|
When Would the Earnings In Box 2 Be Taxable?
- The distributed funds were not used for qualified education expenses.
- The student beneficiary was changed to someone not in the same family.
What are Qualified Education Expenses?
In general, qualified education expenses are the expenses required for a designated beneficiary to enroll at or attend an eligible educational institution, and the student must be enrolled at least half-time. The institutions include elementary, secondary, and postsecondary, and the list of expenses includes among other things tuition, books, fees, room and board, and computer equipment. IRS Publication 970 provides separate details for the expenses that qualify for a Coverdell ESA here and a QTP here.
What are Adjusted Qualified Education Expenses?
For a Coverdell ESA: It is the qualified education expenses less:
- expenses paid for with tax-free educational assistance, e.g., grants and scholarships
- expenses deducted on Schedules 1, C, or F
- expenses on which the American Opportunity Credit or Lifetime Learning Credit was based
For a QTP: it is the qualified education expenses less tax-free educational assistance.
How is the taxable portion calculated?
Box 2 earnings minus ( ( Adj Qualified Education Expenses / Box 1 distribution ) x Box 2 earnings )
To enter Qualified Education Program Payments in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Other Income (W-2G, 2555)
- Other Income
- Taxable Education Program Payments (1099-Q) - For a MFJ return, note if the 1099-Q is for the taxpayer or the spouse and enter on the appropriate line the Box 1 and 2 amounts along with the adjusted qualified education expenses.
Note: This is a guide to entering qualified education program payments into the TaxSlayer Pro program. This is not intended as tax advice.