Form 1099-Q (2010): Payments From Qualified Education Programs — Complete Guide

One-liner: Form 1099-Q reports distributions from 529 plans (QTPs) and Coverdell ESAs. If the money was used for qualified education expenses, the earnings portion is generally tax-free; otherwise, part of it can be taxable (and sometimes subject to a 10% additional tax).

What the form is for

• Reports total distributions (Box 1), split into earnings (Box 2) and basis/contributions (Box 3).
• Sent by the plan administrator/trustee when a distribution occurs during 2010.
• Think of it as the “receipt” for tapping your education savings.

Who gets it

• 529/QTP: The beneficiary is shown as recipient if funds were paid to the beneficiary or directly to the school. Otherwise the account owner is the recipient.
• Coverdell ESA: The beneficiary is always the recipient.

2010 deadlines & fixes

• Recipient copy due: Jan 31, 2011
• IRS filing (Copy A): Feb 28, 2011 (paper) or Mar 31, 2011 (e-file)
• Wrong form? Ask the administrator for a CORRECTED 1099-Q.
• Missed/incorrect on your return? File Form 1040X (generally within 3 years of the original due date).

Key rules (2010)

• Tax-free if qualified: Distributions used for qualified education expenses are nontaxable. Nontaxable 1099-Q distributions (including rollovers) do not need to be reported on your tax return—keep records.
• 60-day rollover window: A distribution rolled over to another 529/ESA within 60 days remains nontaxable. Safer: request a trustee-to-trustee transfer (Box 4 checked).
• One rollover per 12 months (per beneficiary) for QTPs: More than one in 12 months can make earnings taxable.
• Beneficiary changes:
  • 529/QTP: Change is tax-free if new beneficiary is a family member.
  • Coverdell ESA: New beneficiary must be a family member and generally under age 30 (special-needs exception).
• 10% additional tax: May apply to taxable earnings from nonqualified distributions. See Form 5329 for exceptions (e.g., death, disability, scholarship).
• Family member (broad): Includes spouse, children (and descendants), siblings (and their children), parents (and ancestors), in-laws, stepparents/stepchildren, and first cousins, plus spouses of all the above.

How to read the form (2010 layout)

• Box 1: Gross distribution (total withdrawn).
• Box 2: Earnings portion.
• Box 3: Basis (your contributions). (Box 2 + Box 3 = Box 1)
• Box 4: Checked if trustee-to-trustee transfer.
• Box 5: Program type indicator (e.g., private/state 529, Coverdell ESA).
• Box 6: Checked if the recipient is not the designated beneficiary.
• Coverdell note: For certain ESA payouts, Boxes 2–3 might be blank; the trustee may instead show FMV at 12/31/2010—use Pub. 970 worksheets to compute earnings/basis.

Step-by-step (taxpayer)

1. Verify details: Name/SSN, and that Box 2 + Box 3 = Box 1. Note Box 4 and Box 6 if checked.
2. Match to expenses: Total your qualified education expenses for 2010 (tuition/fees/required books/supplies/equipment; room & board if at least half-time for 529/QTP).
3. Decide taxability:
   • If qualified expenses ≥ Box 1 → distribution generally nontaxable.
   • If qualified expenses < Box 1 → a portion of Box 2 (earnings) is taxable (and may face the 10% tax).
4. Report if taxable: Include the taxable earnings as Other income (Form 1040). If the 10% additional tax applies, file Form 5329.
5. Keep records: If nontaxable, you usually don’t report 1099-Q—but keep 1099-Q, bills, receipts, 1098-T, and your allocation worksheets.

Quick math for a nonqualified portion
Taxable earnings = Box 2 × (non-qualified portion ÷ Box 1)
Where non-qualified portion = Box 1 – qualified expenses – (any rolled/ transferred amounts).

Example: Box 1 = 10,000; Box 2 = 2,500; Qualified expenses = 8,500 →
Non-qualified portion = 1,500 → Taxable earnings = 2,500 × (1,500/10,000) = 375. (10% additional tax may apply to the 375 unless an exception.)

Common mistakes (and fixes)

• Treating all of Box 1 as taxable. Only some or all of Box 2 can be taxable; Box 3 is your own contributions.
• Missing the 60-day rollover. Prefer trustee-to-trustee to avoid the clock.
• Multiple 529 rollovers in 12 months. Can make earnings taxable—track dates.
• Taxable beneficiary change. Confirm the family-member rule (and ESA age rule).
• Ignoring Box 6. If checked, the recipient shown (not the beneficiary) reports any taxable part.
• Final-distribution loss. A deductible loss is only possible when the account is fully closed and basis isn’t fully recovered—see Pub. 970.

After you file

• Fully qualified use: Usually no return entry; keep your documents.
• Taxable part: Reported as Other income; add Form 5329 if the 10% tax applies (unless you qualify for an exception).
• Corrections: If a corrected 1099-Q arrives and changes your tax, amend with Form 1040X.
• Records: The IRS gets Copy A; keep proof of expenses and how you matched them to distributions.

FAQ (2010)

Do I report a 1099-Q if everything was qualified?
No—nontaxable 529/ESA distributions (including rollovers) aren’t required to be reported. Keep records.

Parent owner, student beneficiary—who reports?
For 529s, if paid to the beneficiary or school, the beneficiary is the recipient. Otherwise the owner is. If Box 6 is checked, the listed recipient (not the beneficiary) handles any taxable part.

My Coverdell 1099-Q has no Boxes 2–3.
That’s allowed for 2010. Use Pub. 970 worksheet to compute earnings/basis (trustee may show year-end FMV).

Distribution codes?
(If present) 1 = distribution/transfer; 2–3 = excess contributions + earnings; 4 = disability; 5 = death; 6 = prohibited transaction.

Can I change beneficiaries tax-free?
Yes for 529s if the new beneficiary is a family member; Coverdell requires family member and generally under age 30 (special-needs exception).

Multiple accounts/forms?
You’ll get a separate 1099-Q for each program/account. Evaluate taxability per form and keep an allocation worksheet.

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