Problem Description

A Form 1099-Q reporting an education distribution was issued to the taxpayer and needs to be reported on the 1040. Where can this be entered in Lacerte?


Solution Description
To report an Education Distribution / payment from a 1099-Q:
 
  1. Go to Screen 14.3, Education Distributions (ESAs & QTPs).
  2. Enter the information related to the distribution under the Education Distributions (1099-Q) section: 
    1. Enter the Higher education (net of nontaxable benefits).

      *Note- The amount of qualified expenses MUST be input in Higher education (net of nontaxable benefits) (Code 143) in order to show the distribution as nontaxable.  Enter qualified education expenses for tuition, fees, books, supplies and equipment required for the enrollment or attendance of the beneficiary at an eligible educational institution. Also include reasonable costs for room and board while attending the eligible institution if the beneficiary attended at least half time. Do not include expenses that were paid from nontaxable benefits such as nontaxable scholarships or grants. The program uses qualified expenses to offset earnings on the ESA and QTP distribution worksheets. If the taxpayer or spouse received multiple distributions from ESA's or QTP's, the expenses entered in this field will be allocated to the ESA's and QTP's according to Pub. 970 instructions. In this case, it is not necessary to enter higher education expenses for each ESA or QTP.  Enter the total expenses in the first ESA or QTP for the taxpayer or the first ESA or QTP for the spouse.
       
    2. Enter the Elementary and secondary education (net of nontaxable benefits).
    3. Enter the Gross Distribution (1) (1099-Q box 1).
    4. Enter the Earnings (2) (1099-Q box 2).
    5. Enter the Basis (3) (1099-Q box 3).
    6. Enter a '1' or '2' in, Rollover : 1=nontaxable, 2=taxable (4).

      Note:  Enter 1 if the ESA or QTP distribution was a nontaxable rollover. Enter 2 if the distribution was a taxable QTP rollover. If the distribution is a nontaxable rollover, it will not be included in the return. If the distribution is a taxable QTP rollover, the earnings portion of the distribution will be included in income on the tax return and subjected to the 10% penalty in Part II of Form 5329.  Refer to Pub 970 for information regarding the taxability and non-taxability of ESA and QTP rollovers.
       
    7. Enter a '1', '2', or '3' in, 1 = private 529 program, 2 = state 529 program, 3 = Coverdell ESA (5) (1099-Q box 5).

      Note:  Enter 1 if this distribution is from a private section 529 program, 2 if from a state section 529 program, or 3 if from a Coverdell Education Savings Account.
       
  3. Click on Add from the left navigation panel to add more 1099-Q distributions.

Note:  If the distribution becomes non-taxable, there is a strong likelihood that a notice will be received by the client indicating amounts as taxable. In order to avoid this, be sure to utilize Screen 47, Notes to illustrate to the IRS that the distribution was absorbed by the expenses, and therefore completely non-taxable. To indicate the distribution was absorbed and not taxable:

  1. Go to Screen 47, Notes.
  2. Select Statement from the left navigation panel.
  3. Enter the information regarding the 1099-Q distribution and expenses incurred.

Once the statement has clearly indicated that the distribution was completely used up, it will indicate to the IRS just what occurred with the distribution. This is necessary due to the fact that the IRS is notified of the distribution, but does not have any knowledge as to what the distribution was used for, or how much was used.

 

Lacerte does not have specific input for the following boxes, please refer to the Form 1099-Q instructions for how to treat these items:

Box 4 - Trustee-to-Trustee Transfer Checkbox - In a trustee-to-trustee transfer between qualified education programs, the distributing program must provide you with a statement reporting the earnings portion of the distribution within 30 days of the distribution or by January 10th, whichever is earlier. You must properly account for this in computing the earnings or (loss) reported in box 2 and the basis reported in box 3.

Box 6 - If this box is checked, the recipient is not the designated beneficiary.

 

Note:  In situations where the client received a 1099-Q distribution and is claiming education expenses via form 8863, be sure that the expenses that are on Screen 38.1, Education Credits/Tuition Deduction (Screen 38 in 2013 and prior years) and on Screen 14.3, Education Distributions are not the same. The education expense amount that was used for the 1099-Q distribution, should not be the exact amount used for form 8863. Only the amount of the education expenses, that remain after being used against the distribution, can be claimed as education expenses for form 8863. If information is reported inaccurately, it could also prompt the receipt of a notice from the IRS.

Example-

The Taxpayer incurred $27,000 worth of education expenses and they received a distribution amount of $26,000 on their 1099-Q. The full amount of the education expenses cannot be indicated in both Screen 14.3, Education Distributions and Screen 38.1, Education Credits/Tuition Deduction. Only the education expenses over the amount of the distribution can be used on Screen 38.1, Education Credits/Tuition Deduction (Screen 38 in 2013 and prior years). In this example, only $1000 would be able to be reported as education expenses on form 8863.