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1099-Q - Who's Tax Return?

 
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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Fri Mar 19, 2004 1:50 pm    Post subject: 1099-Q - Who's Tax Return? Reply with quote

I have a question about Form 1099-Q, Payments fro Qualified
Education Programs.

My wife and I each have 529 accounts set up for our son. He
is the Beneficiary and we are the Owners of the accounts.
The first year we took a distribution was 2003 and we each
received a 1099-Q where we are each listed as the Recipient
on our respective 1099-Qs. I thought that we file these with
our tax returns but that cannot be correct.

My understanding of current tax law is that if the
Distribution exceeds the Qualified Education Expenses there
is no tax due on the earnings. If the Distribution does not
exceed the Qualified Education Expenses then there is tax
due on a portion of the earnings but that tax is paid by the
Beneficiary at their rate. For that to work properly, the
1099-Q must be included on the Beneficiary's tax return, not
the Recipient's.

Also, to get my tax program, TaxAct, to properly treat the
income as non-taxable since the Qualified Education Expenses
did exceed the Distribution, I need to enter Box 6, "This
box is checked if the recipient is not the designated
beneficiary" UNCHECKED even though it is checked on the
1099-Q I received.

I know this is not taxable income since the education
expenses exceeded the distribution. But, can someone explain
the proper way to handle the 1099-Q, other than just
ignoring it and leaving it off the tax returns completely?

Thanks.

--
Vic Roberts

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Phil Marti



Joined: 25 Aug 2007
Posts: 1266

PostPosted: Sun Mar 21, 2004 1:21 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Victor Roberts writes:

> I know this is not taxable income since the education
> expenses exceeded the distribution. But, can someone explain
> the proper way to handle the 1099-Q, other than just
> ignoring it and leaving it off the tax returns completely?

It goes on the tax return (line 21) only if there was
taxable income. See the 1040 instructions and Pub 970. Why
you'd rather figure out some way to get software to ignore
it rather than ignoring it yourself is beyond me.

Phil Marti
Topeka, KS

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Mon Mar 22, 2004 2:20 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

philmarti@aol.com (Phil Marti) wrote:
> Victor Roberts writes:

>> I know this is not taxable income since the education
>> expenses exceeded the distribution. But, can someone explain
>> the proper way to handle the 1099-Q, other than just
>> ignoring it and leaving it off the tax returns completely?

> It goes on the tax return (line 21) only if there was
> taxable income. See the 1040 instructions and Pub 970. Why
> you'd rather figure out some way to get software to ignore
> it rather than ignoring it yourself is beyond me.

Thanks. I have read The instructions for Form 1040 and Pub
970 and know this distribution is not taxable since it was
all used for qualified education expenses. While completing
my taxes I was (temporarily) interested in how the tax
software was unable to deal properly with this, but agree
with you that if I know it is not taxable then why worry
about the software.

However --- we are still left with the hypothetical. If part
of this distribution was taxable, whose tax return dos it
get reported on? As far as I can tell, the answer is -- it
depends - upon how the funds were distributed and how they
were used. And, it seems that current personal-grade tax
software is totally unable to properly deal with 1099Qs that
are taxable. I contacted the tech support people at the
company who makes the software I am using. They agreed their
software has problems with Form 1099Q, but also said that
the IRS instructions on how to deal with these forms were
not yet complete. (Is this correct?) I even contacted the
CPA who does the tax return for my small C Corp. He said
that even his "professional grade" software does not deal
properly with 1099Qs.

I only spotted this problem because I knew that the
distribution was not taxable yet it increased my tax
liability when I included the 1099Q in my return. How many
people who do not understand the law may end up paying the
wrong amount of tax because tax software does not yet
understand how to treat the 1099Q?

--
Vic Roberts

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Mon Mar 22, 2004 2:39 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

philmarti@aol.com (Phil Marti) wrote:
> Victor Roberts writes:

>> I know this is not taxable income since the education
>> expenses exceeded the distribution. But, can someone explain
>> the proper way to handle the 1099-Q, other than just
>> ignoring it and leaving it off the tax returns completely?

> It goes on the tax return (line 21) only if there was
> taxable income. See the 1040 instructions and Pub 970. Why
> you'd rather figure out some way to get software to ignore
> it rather than ignoring it yourself is beyond me.

Let me answer your question is a slightly different manner.

As a non-professional I was under the perhaps mistaken
impression that if I receive a 1099-Q (or any other such
form) that is also sent to the IRS, then that 1099Q should
be reported on the proper tax return, if for no other reason
then the IRS would be looking for a match to the form they
had received. However, I could not figure out how to include
the 1099Q without also having the tax software think it was
taxable income, which I knew it was not.

--
Vic Roberts

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A.G. Kalman



Joined: 25 Aug 2007
Posts: 662

PostPosted: Mon Mar 22, 2004 2:58 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Phil Marti wrote:
> Victor Roberts writes:

>> I know this is not taxable income since the education
>> expenses exceeded the distribution. But, can someone explain
>> the proper way to handle the 1099-Q, other than just
>> ignoring it and leaving it off the tax returns completely?

> It goes on the tax return (line 21) only if there was
> taxable income. See the 1040 instructions and Pub 970. Why
> you'd rather figure out some way to get software to ignore
> it rather than ignoring it yourself is beyond me.

Just to be clear: If any part was taxable, it would go on
the beneficiary's tax return. This 1099-Q must have had the
parent's SS# because the distribution did not go directly to
the school nor did it go to the beneficiary.

--
Alan
http://taxtopics.net

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Phil Marti



Joined: 25 Aug 2007
Posts: 1266

PostPosted: Tue Mar 23, 2004 12:46 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Victor Roberts writes:

> I only spotted this problem because I knew that the
> distribution was not taxable yet it increased my tax
> liability when I included the 1099Q in my return. How many
> people who do not understand the law may end up paying the
> wrong amount of tax because tax software does not yet
> understand how to treat the 1099Q?

Good for you. As our Helen is fond of saying, all software
guarantees you is a pretty return.

Phil Marti
Topeka, KS

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MTW



Joined: 25 Aug 2007
Posts: 713

PostPosted: Tue Mar 23, 2004 1:06 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

A.G. Kalman wrote:

> Just to be clear: If any part was taxable, it would go on
> the beneficiary's tax return.

Would that mean that if the parent absconded with the money,
the kid/beneficiary would be stuck with the resulting tax
and penalty?

MTW

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MTW



Joined: 25 Aug 2007
Posts: 713

PostPosted: Tue Mar 23, 2004 1:06 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Victor Roberts wrote:

> And, it seems that current personal-grade tax
> software is totally unable to properly deal with 1099Qs that
> are taxable.

I disagree. I think the software handles 'em just fine. The
problem is NOT the handling. Rather, it is WHOSE return to
associate the 1099-Q with. I'm not aware on ANY software
that can "properly deal" with a 1099 (of ANY variety) that
is improperly associated with a particular return in the
first place.

> I contacted the tech support people at the
> company who makes the software I am using. They agreed their
> software has problems with Form 1099Q, but also said that
> the IRS instructions on how to deal with these forms were
> not yet complete. (Is this correct?)

I don't know whether the "not yet complete" statement is
technically correct, but I can say that I think the 1099-Q
form is poorly designed and the instructions related to it
aren't particularly informative. The fault for this belongs
with the forms drafters at the IRS, not the tax software
developers. Perhaps by next year there will be better
instructions and, therefore, "better" software.

MTW

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A.G. Kalman



Joined: 25 Aug 2007
Posts: 662

PostPosted: Tue Mar 23, 2004 1:06 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Victor Roberts wrote:
> philmarti@aol.com (Phil Marti) wrote:
>> Victor Roberts writes:

>>> I know this is not taxable income since the education
>>> expenses exceeded the distribution. But, can someone explain
>>> the proper way to handle the 1099-Q, other than just
>>> ignoring it and leaving it off the tax returns completely?

>> It goes on the tax return (line 21) only if there was
>> taxable income. See the 1040 instructions and Pub 970. Why
>> you'd rather figure out some way to get software to ignore
>> it rather than ignoring it yourself is beyond me.

> Let me answer your question is a slightly different manner.
>
> As a non-professional I was under the perhaps mistaken
> impression that if I receive a 1099-Q (or any other such
> form) that is also sent to the IRS, then that 1099Q should
> be reported on the proper tax return, if for no other reason
> then the IRS would be looking for a match to the form they
> had received. However, I could not figure out how to include
> the 1099Q without also having the tax software think it was
> taxable income, which I knew it was not.

The optimal method for taxpayers is to never take a
distribution unless you are the beneficiary or have it go
directly to the school. That said, if you want to account
for the 1099-Q, all you need to do (I'm not a Turbo-Tax
user) is create the 1099-Q and the income for Line 21 Other
Income and then create an offsetting negative amount for the
same line.

--
Alan
http://taxtopics.net

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Tue Mar 23, 2004 11:44 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

MTW" wrote:
> Victor Roberts wrote:

>> And, it seems that current personal-grade tax
>> software is totally unable to properly deal with 1099Qs that
>> are taxable.

> I disagree. I think the software handles 'em just fine. The
> problem is NOT the handling. Rather, it is WHOSE return to
> associate the 1099-Q with. I'm not aware on ANY software
> that can "properly deal" with a 1099 (of ANY variety) that
> is improperly associated with a particular return in the
> first place.

You are correct that I entered the 1099-Q on the wrong tax
return, and THAT was my problem. You know this because we
have discussed this problem in a group devoted to the
particular tax program involved Smile

However, even if I had entered the 1099-Q on the correct tax
return, I still would have had to ignore the instructions to
get the correct computation. Box 6 on the 1099-Q is checked.
Box 6 reads "If this box is checked, the recipient is not
the designated beneficiary." The tax software ONLY asks if
Box 6 is checked. So, if I entered this on my son's tax
return, where it belongs, and checked Box 6 during the
interview process, the tax program would have added the
earnings on this 1099-Q to my son's taxable income. The
interview question should not be "is box 6 checked?" the
question should be "are you the designated beneficiary?"

>> I contacted the tech support people at the
>> company who makes the software I am using. They agreed their
>> software has problems with Form 1099Q, but also said that
>> the IRS instructions on how to deal with these forms were
>> not yet complete. (Is this correct?)

> I don't know whether the "not yet complete" statement is
> technically correct,

That is their term, not mine.

--
Vic Roberts

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Tue Mar 23, 2004 11:44 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

>>>> I know this is not taxable income since the education
>>>> expenses exceeded the distribution. But, can someone explain
>>>> the proper way to handle the 1099-Q, other than just
>>>> ignoring it and leaving it off the tax returns completely?

>>> It goes on the tax return (line 21) only if there was
>>> taxable income. See the 1040 instructions and Pub 970. Why
>>> you'd rather figure out some way to get software to ignore
>>> it rather than ignoring it yourself is beyond me.

>> Let me answer your question is a slightly different manner.
>>
>> As a non-professional I was under the perhaps mistaken
>> impression that if I receive a 1099-Q (or any other such
>> form) that is also sent to the IRS, then that 1099Q should
>> be reported on the proper tax return, if for no other reason
>> then the IRS would be looking for a match to the form they
>> had received. However, I could not figure out how to include
>> the 1099Q without also having the tax software think it was
>> taxable income, which I knew it was not.

> The optimal method for taxpayers is to never take a
> distribution unless you are the beneficiary or have it go
> directly to the school.

As far as I know the distribution can be paid only to the
owner or the school. There is no provision that I know of
where the funds from the 529 plan in my state (NY) can be
paid by the trustee directly to the beneficiary.

> That said, if you want to account
> for the 1099-Q, all you need to do (I'm not a Turbo-Tax
> user) is create the 1099-Q and the income for Line 21 Other
> Income and then create an offsetting negative amount for the
> same line.

Did I say I was using TurboTax? I am not Smile

--
Vic Roberts

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Tue Mar 23, 2004 11:44 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

MTW" wrote:
> A.G. Kalman wrote:

>> Just to be clear: If any part was taxable, it would go on
>> the beneficiary's tax return.

> Would that mean that if the parent absconded with the money,
> the kid/beneficiary would be stuck with the resulting tax
> and penalty?

As I mentioned in our other conversation, my accountant said
"it depends" when asked which tax return the 1099-Q is
reported on if there is taxable income. I have not yet
looked into the conditions where the income would be taxed
to the owner instead of the beneficiary, but this may be
one.

--
Vic Roberts

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A.G. Kalman



Joined: 25 Aug 2007
Posts: 662

PostPosted: Tue Mar 23, 2004 11:44 am    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

MTW wrote:
> A.G. Kalman wrote:

>> Just to be clear: If any part was taxable, it would go on
>> the beneficiary's tax return.

> Would that mean that if the parent absconded with the money,
> the kid/beneficiary would be stuck with the resulting tax
> and penalty?

My answer only dealt with the case where the benefit of the
distribution went to the designated beneficiary. Per IRC
Sec. 529(c)(3)(B)(iv):

Treatment as distributions
Any benefit furnished to a designated beneficiary under a
qualified tuition program shall be treated as a distribution
to the beneficiary for purposes of this paragraph.

If the benefit went to the parent, the income belongs to the
parent.

--
Alan
http://taxtopics.net

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MTW



Joined: 25 Aug 2007
Posts: 713

PostPosted: Wed Mar 24, 2004 12:52 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

Victor Roberts wrote:

> However, even if I had entered the 1099-Q on the correct tax
> return, I still would have had to ignore the instructions to
> get the correct computation. Box 6 on the 1099-Q is checked.
> Box 6 reads "If this box is checked, the recipient is not
> the designated beneficiary." The tax software ONLY asks if
> Box 6 is checked. So, if I entered this on my son's tax
> return, where it belongs, and checked Box 6 during the
> interview process, the tax program would have added the
> earnings on this 1099-Q to my son's taxable income. The
> interview question should not be "is box 6 checked?" the
> question should be "are you the designated beneficiary?"

But why is this any different than the problems associated
with OTHER series of 1099s? For example, just because the
payer reports a number in Box 2a of Form 1099-R doesn't
necessarily mean that you owe tax on that amount. Similarly,
just because the payer puts a Code 1 in Box 7 of the "R"
doesn't necessarily mean that you owe a penalty. In both
cases the person preparing the return has to consider ALL
the facts that bear on the situation, including information
that the 1099 issuer is not privy to or responsible for
reporting.

So, I think all this really proves is that tax software
(especially in "interview" mode) is NOT a substitute for
adequate knowledge of tax law or return preparation
techniques.

MTW

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Victor Roberts



Joined: 25 Aug 2007
Posts: 82

PostPosted: Thu Mar 25, 2004 4:06 pm    Post subject: Re: 1099-Q - Who's Tax Return? Reply with quote

MTW" wrote:

> So, I think all this really proves is that tax software
> (especially in "interview" mode) is NOT a substitute for
> adequate knowledge of tax law or return preparation
> techniques.

I fully agree. Well said.

--
Vic Roberts

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