Title: Form 1099‑Q — Payments From Qualified Education Programs (What it Shows, How to Handle It)
Overview
– Form 1099‑Q reports distributions (including rollovers) from qualified tuition programs (529 plans, also called QTPs) and Coverdell education savings accounts (CESAs/ESAs).
– The form is informational: it shows gross distributions, earnings, and basis for the tax year so recipients can determine whether any portion of a distribution is taxable.
– Issuers (state QTPs, trustees, or custodians) must send Copy B to the recipient, Copy A to the IRS, and keep Copy C for their records.
Primary sources: IRS Instructions for Form 1099‑Q; IRS Topic No. 313 (QTPs); IRS Topic No. 310 (CESAs); IRS Publication 970 (Tax Benefits for Education).
Who files and who receives Form 1099‑Q
– The payer/trustee of the 529 or Coverdell account prepares and files Form 1099‑Q. That issuer must include its name/TIN and the recipient’s name/TIN (the Social Security number usually).
– The form is issued to the recipient of the distribution—the person whose SSN/TIN is shown. That recipient is generally the beneficiary (student) if distributions went to the student or the school, but it can be the account owner (for example, a parent) if the owner received the funds. The person whose SSN is on the form is responsible for reporting any taxable amount.
What the boxes on Form 1099‑Q mean
– Box 1 — Gross distribution: total amount distributed in the year (cash or in‑kind).
– Box 2 — Earnings: portion of the gross distribution that represents earnings.
– Box 3 — Basis: contributions/after‑tax amounts included in the gross distribution (Box 1 = Box 2 + Box 3).
– Box 4 — Trustee‑to‑trustee transfer indicator (checked if the distribution was a direct transfer).
– Box 5 — Type of account (QTP or CESA).
– Box 6 — Indicates whether the recipient is the designated beneficiary.
– Distributors may also include distribution codes or additional details below these boxes.
Which distributions are tax‑free vs taxable
– Qualified distributions (used for qualified education expenses) are generally tax‑free. Qualified expenses typically include tuition, fees, required books/supplies, and—subject to limits—room and board for students enrolled at least half‑time. (See IRS Pub. 970 for details.)
– If gross distributions exceed the beneficiary’s adjusted qualified education expenses for the year, the excess is taxable to the recipient — but only to the extent it represents earnings (Box 2).
– Nonqualified distributions: earnings portion included in income and generally subject to a 10% additional tax on the earnings portion unless an exception applies (death, disability, scholarship offset, etc.).
Practical steps — how to handle a received Form 1099‑Q
1. Verify the form
– Confirm your name, address, and SSN/TIN and the amounts in Boxes 1–3. Contact the issuer if anything is incorrect.
2. Gather documentation of qualified education expenses
– Collect bills, receipts, billing statements, and school records showing tuition, required fees, books, supplies, and room-and-board (if applicable) for the tax year. Keep these records with your tax file.
3. Reconcile distributions and expenses
– Compare total qualified expenses to total distributions received for the same beneficiary during the year (including distributions sent directly to schools). Include only eligible expenses and follow Pub. 970 rules about timing and which expenses are “adjusted” for tax purposes.
4. Calculate the taxable portion (basic method)
– Taxable amount = excess of gross distributions (Box 1) over adjusted qualified education expenses for the year, limited to the earnings portion (Box 2).
– Example: Gross distribution = $10,000 (Box 1), earnings = $3,000 (Box 2), basis = $7,000 (Box 3). If qualified expenses = $8,000, taxable amount = $10,000 − $8,000 = $2,000. Because earnings were $3,000, the taxable portion (from earnings) = $2,000. A 10% penalty on that $2,000 ($200) generally applies unless an exception exists.
– Use the worksheet in IRS Publication 970 and the Form 1099‑Q instructions to allocate distributions between earnings and basis precisely when there are multiple distributions or carryforwards.
5. Report any taxable amount on your federal return
– Include the taxable portion on your Form 1040 as required (follow Form 1040 and Schedule 1 instructions). Publication 970 and the Form 1099‑Q instructions show where to enter the amounts.
– If a 10% additional tax applies to the earnings (nonqualified portion), typically report it on Form 5329 unless an exception applies.
6. Keep records
– Retain Form 1099‑Q and all receipts/proofs of qualified expenses for at least three years (or longer if your situation requires).
7. If you didn’t receive a Form 1099‑Q but had distributions
– Contact the plan/trustee; the issuer is required to send it. Don’t ignore the distribution—report the income appropriately if it’s taxable even if the issuer made a filing error.
Special rules and common questions
– Who files the return — parent or student?
– The person whose SSN/TIN is shown on Form 1099‑Q is the recipient and must report any taxable portion. If the parent is the recipient (their SSN on the form), the parent reports; if the beneficiary (student) is the recipient, the student reports.
– Do 529 withdrawals count as income?
– Contributions (basis) are not taxed when withdrawn (they were made with after‑tax dollars). Earnings are tax‑free if used for qualified education expenses. Earnings used for nonqualified expenses are taxable to the recipient and may trigger the 10% penalty.
– Rollovers and transfers
– Trustee‑to‑trustee transfers (direct rollovers) are generally not taxable; Box 4 indicates these. Indirect rollovers must be completed within 60 days to avoid taxation.
– Rollovers from a QTP to an ABLE account are permitted under the Tax Cuts and Jobs Act (for rollovers after Dec. 22, 2017) without penalty if rules are followed; check current law for time limits or extensions.
– Changing the designated beneficiary is generally allowed tax‑free if the new beneficiary is a family member of the old beneficiary. Special rules differ between QTPs and CESAs; more than one rollover or transfer within a 12‑month period for the same beneficiary in a QTP can create tax consequences—see the Form 1099‑Q instructions and Pub. 970.
– Interaction with education tax credits
– You cannot “double‑dip.” The same qualified expenses cannot be used to justify both a tax‑free 529/Coverdell distribution and to claim the American Opportunity Tax Credit or Lifetime Learning Credit. Coordinate and document which expenses are used for which tax benefit.
– Exceptions to the 10% penalty
– Certain exceptions (death or disability of the beneficiary, scholarships, or attendance at a U.S. military academy among others) can eliminate the 10% additional tax on the earnings portion of a nonqualified distribution. Income tax on earnings may still apply (see Pub. 970).
State tax treatment
– State treatment of 529/Coverdell distributions varies. Some states conform to the federal rules; others have different rules for state tax purposes. Check your state tax authority or a tax advisor for state-specific guidance.
If you disagree with the amounts on Form 1099‑Q
– Contact the issuer first to request a corrected form. If you still can’t resolve it, keep documentation supporting your position and consult a tax professional.
When to get professional help
– Complex situations—multiple distributions, rollovers, changes of beneficiary, overlapping tax credits, out‑of‑period expense allocations, or large taxable amounts—are good reasons to consult a CPA or tax attorney. A professional can help ensure you apply the correct allocation rules and avoid penalties.
Key IRS references
– IRS, Instructions for Form 1099‑Q: Payments From Qualified Education Programs
– IRS, Topic No. 313 — Qualified Tuition Programs (QTPs)
– IRS, Topic No. 310 — Coverdell Education Savings Accounts
– IRS Publication 970 — Tax Benefits for Education (detailed worksheets and examples)
Bottom line
Form 1099‑Q is an informational form to help recipients determine whether distributions from 529 plans or Coverdell accounts are taxable. The recipient named on the form is responsible for reporting any taxable portion, which depends on how distributions compare to qualified education expenses and whether the distributions include earnings. Keep careful records, reconcile distributions to education expenses, use the worksheets in Pub. 970, and consult a tax professional for complicated cases.