1099-q and dependency

[Snaggletooth]

Taxpayer cashed out a 529 plan, and paid college expenses for their son with the proceeds. Meanwhile, the student is married, gainfully employed, and is claiming himself. Son also has a 1098-T indicating he is "more than a half-time student." Are the withdrawn funds eligible to be non-taxable? Expenses exceed amount of withdrawn funds and accumulated earnings.

Checked with TTB, and reference language is to the "beneficiary". Does not mention dependency to be a requirement. Son is clearly the beneficiary but not the dependent.

What say ye? Withdrawn funds taxable or non-taxable?

[FEDUKE404]

Dealing with Form 1099-Q potential taxable income

Taxpayer cashed out a 529 plan, and paid college expenses for their son with the proceeds. Meanwhile, the student is married, gainfully employed, and is claiming himself. Son also has a 1098-T indicating he is "more than a half-time student." Are the withdrawn funds eligible to be non-taxable? Expenses exceed amount of withdrawn funds and accumulated earnings.

Checked with TTB, and reference language is to the "beneficiary". Does not mention dependency to be a requirement. Son is clearly the beneficiary but not the dependent.

What say ye? Withdrawn funds taxable or non-taxable?

The beneficiary (as should be shown on the Form 1099-Q) is responsible for any possible taxes on the reported withdrawal. Pay attention to the "earnings" box.

For all intents and purposes, you need to do some kind of worksheet listing applicable expenses (there are many) to offset any Form 1099-Q taxable income. Whatever is left over goes on the beneficiary's line 21. Most professional tax software can handle this chore.

I've had clients who "knew" their expenses were greater than the Form 1099-Q (either Coverdell or 529) amounts, and just kinda ignored that document. The IRS took a different approach, saw only the "income," and sent them a friendly letter for unreported income. Perhaps when you fill in the worksheets with your software, something (internal) goes to the IRS to appease them? Who knows. . .

FE