A Complete Breakdown Of The 1099-Q Form

Are you contributing money to a qualified tuition program, such as a 529 plan or a Coverdell Education Savings Account (ESA)? If so, you will receive an IRS Form 1099-Q in a year you make distributions to pay school costs of the beneficiary. The 1099-Q is a tax form sent to individuals who receive payments from qualified tuition programs (QTPs) like Coverdell ESA or a 529 plan. Depending on how you spend the money, these distributions can be taxable, and this form is then used to fill out both federal and state tax returns if the withdrawals made are subject to tax.  

Coverdell ESA and 529 plan

There are two main types of college savings accounts, Coverdell ESA, and 59 plan which could be a great opportunity for your child or grandchild to graduate from college debt-free. A Coverdell ESA is a trust or custodial account that allows you to save and grow your money for educational purposes. A 529 plan is a state-run tax-advantaged account that allows you to set aside fund for educational expenses. Both ESAs and 529s are funded with money that’s already been taxed – Therefore, the money grows tax-free and isn’t taxed when you take it out as long as you use it for a qualified education expenses such as tuition and textbook.  

Who files Form 1099-Q?    

Form 1099-Q should be filed by officers or employees who have control of a program and manage your 529 plan or Coverdell ESA. If you set up the account and make contributions to it, you are the owner and are the recipient of the 1099-Q. The administer of your qualified tuition plans must send you the Form 1099-Q in any year you take a withdrawals or transfer funds between accounts.

There are three copies of the 1099-Q. The distributor files Copy A with the IRS, sends you Copy B, and retains Copy C. Filers should receive Form 1099-Q in the mail.

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 (e-file), or February 28 if using a paper copy. If you don't receive a 1099 and you know you should, contact the administer of your qualified tuition plans.

What information is on Form 1099-Q?

The 1099-Q provides three key information in a form. Box 1 reports your total amount of annual distributions from the account. The second box reports the portion of the distribution that represents the income or earnings of your initial investment. 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.

Who uses the 1099-Q for their tax return?

Whoever the 1099-Q is issued to must report that 1099-Q on their tax return. In other words, the person whose SSN is on the 1099-Q should report the form – it could be the beneficiary student or the account owner, who may be a parent or other relative. It’s likely that the student/beneficiary will pay little or nothing on the distributions as they won’t have any other income.

If distributions aren't taxable – meaning if the distribution doesn’t exceed the amount of the student’s qualifying expenses, taxpayers receiving a 1099-Q don't need to report them in their tax return but should keep the form with their tax records. If distributions are subject to taxes – meaning if the distribution exceeds the amount of the student’s qualifying expenses, you must report the earnings on the excess as “other income” by adding to Line 21 of Schedule 1 and attached to Form 1040, your federal tax return, while also retaining your 1099-Q copy with your tax records.

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.

Qualified Expenses – what you can pay for with a 529 plan or Coverdell ESA

In order a 529 plan or Coverdell ESA fund to be fully non-taxable, the distributed money must be used to pay for qualified higher education expenses.

Again, money invested in a 529 plan or Coverdell ESA grows tax-deferred, and qualified distributions are tax-free. Families may also enjoy a state income tax deduction or credit for 529 plan contributions, depending on where they live.

Qualified higher-education expenses are essential costs related to the enrollment or attendance of an eligible educational institution. This includes tuition, qualified education programs, fees for enrollment, books, and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense. For any distribution made after 2018, qualified education expenses of 529 plan include certain expenses associated with registered apprenticeship programs and qualified student loans. Apprenticeship program expenses includes expenses for fees, books, supplies, and equipment required for the participation of the designated beneficiary in an apprenticeship program registered and certified with the Department of Labor.

When the money can be distributed?

Parents can withdraw money from a 529 plan at any time for any reason. However, the earnings portion of a non-qualified distribution will incur income tax and a 10% penalty.  For Coverdell ESA, Amounts remaining in the account must be distributed when the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.

Take away

Both the 529 plan and Coverdell ESA accounts are tax-advantaged investment accounts that can help you or your family save for education expense goods. The accounts allow your earnings to grow tax-free as long as you use withdrawals only for qualified education spending and follow other IRS requirement for the accounts. If you withdraw funds from one of these accounts during the tax year, the account administrator is required to issue Form 1099-Q to you and the IRS.  When you receive Form 1099-Q, don’t panic, you just need to report it on your federal and state income tax returns. As long as the distribution was spent on qualified education expenses and meets all other qualifications, you don’t need to pay tax on those withdrawals. If you have any questions about your tax situation refer to IRS Publication 970 or talk to a tax professional. A preparer can provide you with tax advice and properly help you with tax preparation.

Soo Lee

Soo Lee

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Soo has over 10 years of experience in publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diversified industries including manufacturing, wholesale/retail businesses, construction, real estate development and investment, banking, finance and professional/legal consulting service. In Particular, when Soo was at Pricewaterhouse Cooper, Soo worked with many foreign owned U.S. companies and advised clients on a broad range of issues including federal and state tax minimization especially through R&D tax credit, determination of the optimal structure for new foreign investments, restructuring and reorganization for existing operations.

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