Educator Expenses/1099-Q

[Jesse]

Client is a teacher with $250 Educator expenses. He set up a qualified Ed-Vest fund with his son as the designated beneficiary. The total amount was used to pay his sons tuition with basis of $6,500 and Earnings of $270.

The educator expense is being reduced to Zero because of the non-taxable distribution from the program.

Is this correct if the funds were used for the designated beneficiary, his son?

Is this because the fund is in the taxpayers name and having a designated beneficiary has no bearing?

[S T]

I tried a what if

I am not coming up with the same result.

I tried a what if on 1099Q $6,500 gross distributions, $270 earnings, basis $6,230, type of plan, public qualified, and the recipient is not/or is the designated beneficiary.

I entered $250 as educator expense

Result, line 21, education distr $270, line 23 $250 educator expense.

Maybe I don't have enough of the fact pattern to enter for a test!

Sandy

[Jesse]

But the income should not flow to line 21. The designated beneficiary is the son and the entire amount was used to pay for tuition. The $270 earnings is not taxable, correct?

The fund was set up by the parent with the son as the designated beneficiary, and is not calculating income on the earnings but subtracts the $270 earnings from the $250 educator expense leaving the parent with zero credit.

[S T]

Educator Expense

Jesse, well if I would have entered the expenses for the 1099Q it would have given me no taxable earnings.

So 1099Q worksheet shows total earnings distributed 270
Ed Expenses allocated to qualified tuition programs 6,500
Total distributions from all qualified tuition programs 6,500
tax free earnings is 270

I entered the educator expenses of 250 and shows a deduction on line 23 of 1040.

My software is not subtracing the earnings from the 250 educator expenses.

Sandy

[Jesse]

Sandy,
I am working with Proseries - what program do you use?

If Proseries - maybe I'm entering something incorrect.

If not - could it possibly be a glitch in the Proseries program or am I still entering something incorrect?

If I override I want to make sure I am correct in my conclusion - If the monies was used for qualified education expense for the designated beneficiary the earnings should not decrease the educator expense of the taxpayer that made contributions to the Ed-Vest, correct?

It should come out as:

1099Q worksheet shows:

Total earnings distributed $270
Total Basis distributed $6,500
Ed Expenses allocated to qualified tuition programs 6,770
Tuition was actually in excess of $10,000
Designated beneficiary checked, tuition allocated to son as Designated Beneficiary.
Tax free earnings is 270

The program is still transferring the $270 to the Educator expense worksheet with a net deduction for Educator expense = Zero

[BP.]

Can't imagine why/how the 1099Q earnings have an impact on the educator expenses deduction. Since you've determined that nothing from the 1099Q is taxable, why not just leave it off your worksheet entirely?

And did you first figure your tuition credits, if any available, and then figure if there's any taxable portion of the earnings?

[Earl]

Educator Expense

Educator expense and education expenses are two entirely different things. One does not have anything to do with the other. Possibly you are entering the educator expense incorrectly - I do not understand the purpose of a worksheet for this entry as it is pretty cut and dried entry with only the $250 limiting adjustment.

[S T]

Software

Jesse, your calculations seem to be correct.

Is your 1099Q a "Coverdell Education Savings"?

Educator Expenses Deduction would be reduced by any tax free withdrawals from Coverdell http://www.irs.gov/taxtopics/tc458.html



Sandy

[BP.]

Jesse, your calculations seem to be correct.

Is your 1099Q a "Coverdell Education Savings"?

Educator Expenses Deduction would be reduced by any tax free withdrawals from Coverdell http://www.irs.gov/taxtopics/tc458.html



Sandy

Wow, nice work, Sandy! Who knew?? I sure didn't!
PS- Also found the same info in pub 17, p. 133.

[Earl]

educator expenses

Agreed. Nice work. Never would have thought of that outcome.

[Jesse]

It is not a Coverdell, but Wisconsin Ed-Vest, which would fall under the category of:

-Any distribution from a qualified tuition program that you excluded from income.

So, what I question is - he set up the tuition account for his sons expenses, the son is the designated beneficiary. The 1099Q is in the taxpayers name with the box checked for belonging to a designated beneficiary - again the son. Is it still considered the taxpayers account? Therefore no deduction?

If this be the case, what they could have done is put the Ed-Vest in the wife's name w/ son as designated beneficiary and it would not effect his educators expense deduction?

[S T]

Educator Expense

I agree Jesse, I have not found anything other than the Coverdell that might affect the Educator Expenses, but it would not seem that is correct as the recipient is not the beneficiary.

In my software, it says to check the box IF the recipient IS NOT the designated beneficiary. And the box says Yes.

Maybe try unchecking the box and see what happens.

If I work it in my software, it allows the $250 Educator Expense.

Sandy

[Jesse]

I think it is just what it is - his account because he has control over it. He can change the designated beneficiary or withdraw the funds without paying any qualified expenses for his son at any time he wants. At least this is how I will break the news to him.

This is a new client who used the HRB online do it yourself last year, and he was in the same situation but took the $250 educator expense. I'm guessing he just knew he was allowed the deduction so checked and unchecked boxes until the expense showed up on his return.

Better planning in the future is to put the EdVest in spouses name unless both are teachers.

Thanks for all responses!

[Jesse]

I agree Jesse, I have not found anything other than the Coverdell that might affect the Educator Expenses, but it would not seem that is correct as the recipient is not the beneficiary.

In my software, it says to check the box IF the recipient IS NOT the designated beneficiary. And the box says Yes.

Maybe try unchecking the box and see what happens.

If I work it in my software, it allows the $250 Educator Expense.

Sandy

Sandy,
I must have been typing as you posted your response. I just double checked and yes I do have the box IF the recipient IS NOT the designated beneficiary checked yes. The $270 still carries over to disallow the Educator Expense.

The other issue I had to disallow the Wisconsin tuition deduction for the portion paid from the Edvest. He did not do that last year either. I tried to explain that is Wisconsin tax free money you are using so it's like double dipping, you took a deduction for the Edvest when you contributed funds, again only for Wisconsin, and now you paid with those dollars. That didn't sit well and now this!?! He's going to wish he did his own again!