Key Takeaways
- IRS Form 1099-Q is issued when you withdraw funds from a 529 plan or Coverdell ESA, detailing your total withdrawals, including earnings and basis.
- When you receive IRS Form 1099-Q, you'll need to report this information on your tax return if the distribution is used for non-qualifying expenses.
- If your distribution matches or is less than the qualifying educational expenses, you don't need to report it as income; however, any excess is typically taxable and could be subject to a penalty.
- You can't use the same expenses paid with funds from a 529 plan or Coverdell ESA to also claim educational tax credits.
Introduction
If you contribute money to a qualified tuition program, such as a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q in each year you make withdrawals to pay school expenses of the beneficiary. The 1099-Q reports the total of all withdrawals you make during the year; however, some of this amount may be taxable depending on how you spend the money.
Coverdell ESAs and 529 plans
A Coverdell ESA and 529 plan operate in a similar fashion and provide the same type of tax savings. Essentially, these are accounts that are set aside to pay the school expenses of the beneficiary. The plans have some key differences in what educational expenses they cover but their tax treatment is essentially the same: you invest money on behalf of a student (which can be yourself), the investment profits are tax-free and distributions that go to pay qualifying educational expenses are not subject to income tax.
TurboTax Tip:
When you invest money on behalf of a student through a Coverdell ESA or 529 plan, your investments can grow tax-free.
Form 1099-Q information
Form 1099-Q comes from the administrator or bank that manages your 529 plan or Coverdell ESA. If you set up the account and make contributions to it, then you are the owner and are the recipient of the 1099-Q. If you create one of the accounts to put someone other than yourself through school, that student has no control over the funds and is not responsible for any of the tax consequences.
The 1099-Q provides three key pieces of information. Box 1 reports your annual distributions or withdrawals from the account. The second box reports the portion of the distribution that represents the income or earnings of your initial investment. Finally, box 3 reports your basis in the distribution. Essentially, this is the amount of your distribution that relates to original contributions you make to the account.
The form also includes information on the type of account you own and amounts, if any, that you transfer between two qualified tuition plans.
Calculating taxable amount
If the distribution doesn’t exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. When you pay a student’s school expenses with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.
When you will receive 1099-Q
The administrator of your qualified tuition plans must send you the Form 1099-Q in any year you take a distribution or transfer funds between accounts. You should receive the 1099-Q no later than early February following the close of the tax year since the administrator must send it by January 31. Administrators must also provide a copy of each form to the IRS no later than March 31 if sent electronically, or February 28 if using a paper copy.
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