If you’re paying for education expenses out of a tax-free education account for yourself or a dependent, then you’ll receive a 1099-Q form from your plan administrator at the end of the year.
The 1099-Q details the distributions that you received from your qualified tuition program. As long as the distributions are spent on “qualified education expenses,” the money that you withdraw from the account—including any gains that have been generated—will be tax-free. (Your contributions can always be withdrawn tax-free, since you have already paid taxes on that money.)
A 1099-Q is an “information return”, which means the company which handles your education account provides a copy to you and to the IRS. If you don’t report the distribution and offsetting expenses when you file your personal tax return, the IRS computers will flag that discrepancy, and you will likely be asked to explain why you didn’t include that income on your personal tax return.
Here’s what a 1099-Q looks like:
Currently, there are two types of qualified tuition programs that would trigger a 1099-Q when you take distributions: Coverdell ESA and 529 plans. Although their tax-free treatment at the time of distribution is the same, there are several important differences in the accounts themselves.
Here’s everything you need to know about Coverdell ESA tuition plans in a nutshell.
Coverdell ESA accounts can:
Coverdell ESA contribution limits include:
Qualified education expenses include what you would expect:
The 1099-Q will report the amount of the distributions that you received during the tax year. Whether any of that income is taxable will depend on how much you report in qualified expenses.
If you received more in distributions than you spent in qualified expenses, you will have to report the excess as “other income” on your personal tax return, and pay tax on it. You will also be subject to a 10% penalty on that income as well.
Note that if you take a distribution from a Coverdell account, you are prohibited from claiming either the American Opportunity or Lifetime Learning tax credits during the same year for the same expenses. If you have separate expenses that were not covered by the distribution from the Coverdell or the 529, then those credits can be claimed.
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