Discussion:1099-Q beneficiary change who's income?

Daughters 1099T states qualified Tuition was $9,800.00 (box2). She received a Scholarship of 8,596.00 (box 5) with At least 1/2 time student. Oh yes, this is her freshman year.

Per Pub 970, Section 8 (page 50) on qualified tuition program, the calcs go something like Qualified Tuition 9,800.00 less Tuition 8,596.00 = 1,204. Less Hope Credit taken of 1,204.00 = 0 AQEE. So 0 / 3000(distribution) x 1,135.98 (earnings) = 0 Tax free earnings. So, 1,135.98 must be included in Taxable Earnings.

Now the question, who's earnings is it? Is it the Clients or is it the Daughter who must report this as earnings? Since the daughter had no earnings, she would have no tax. But I suspect that the earnings are that of the client.

I have the same type of situation. My client took out a couple of hundred more that the tuition. My feeling is that the parent has control over the 529 account. My client social is also on the account with box 6 checked. I have no problem assigning the earnings to the parent. But here is my question-What happens is there is no earnings to be shown on line 21 of the 1040? It doesn't seem possible that the 1099-Q is issued and then we just ignore it. I don't know of a tax form where we reconcile how the money was used.

Page 50 on left side taxable earnings #2: "this is the amount the Beneficiary Must include in income" (reported on Line 21 1040 other income). So it appears this the daughters income and since the daughter has no other income, I assume she need not file a return. Or does she since "unearned income" is over $250? or is it considered "unearned"?

Thanks for your help. I think this example would make a great commercial to counter turbo-tax's "It's so easy".

thank you

"There is nothing to report if funds were used for qual education expenses. " Correct, however if you plan on taking an education credit for the parents(a better deduction), you have to subtract that from the QEE, which means the recipient is more likely to have income from the 1099Q. Follow the allocation formula in Pub 970. This would be unearned income with a lower threshold filing requirement.

"If it is in the parent's social, then any taxable distribution would go on their return. " I think clearly the rules state it is the beneficiary's income not the person who has the SS number. The tracking here is the box check "recipient is not the designated beneficiary". I do find it odd that the 1099q does not put the Recipient SS number. But, I would bet the IRS supercomputer cross-references the dependents ss number.

One more thing to note, be careful of the scholarship number. It may include living expenses which are taxable to the recipient.

Qualified education expenses. These expenses are the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution (defined in the next column).

 They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. The cost of room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

  1.

     The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
  2.

     The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

 The definition of qualified education expenses was expanded in 2002 to include expenses of a special needs beneficiary that are necessary for that person's enrollment or attendance at an eligible educational institution.

I do see:

Qualified education expenses. For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and

Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.

Expenses that do not qualify. Qualified education expenses do not include the cost of: Room and board,

Travel,

Research,

Clerical help, or

Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

Please understand that I am merely suggesting you look into it. My client's distributions were far less than his tuition, so I've not had to do this. However, I recalled that I had seen mention of it somewhere. Since all other input above ignores it, I am probably overlooking something. However, if not, you might not actually have taxable income.