Form 1099-Q: Payments From Qualified Education Programs (Under Sections 529 and 530) – 2020 Tax Year

One-liner: Form 1099-Q is the “receipt” you (and the IRS) get when money comes out of a 529 plan (QTP) or Coverdell ESA. If you used the money for qualified education expenses, the earnings part is generally tax-free. If not, some earnings can be taxable and may face a 10% additional tax.

What the form shows

• Box 1 = Total distribution (everything that came out).
• Box 2 = Earnings (growth).
• Box 3 = Basis (your contributions).
  You should receive it by Jan 31, 2021 for 2020 distributions.

Who is listed as the recipient?

• 529/QTP: The beneficiary is the recipient only if the payment went to the beneficiary, directly to the school, or trustee-to-trustee to a Roth IRA (rare). Otherwise, the account owner is the recipient.
• Coverdell ESA: The beneficiary is always the recipient.

What counts as qualified education expenses (2020)

• Tuition & required fees at an eligible school
• Required books, supplies, equipment, and computer + internet used primarily by the student
• Room & board if at least half-time (limited to school’s cost-of-attendance allowance or on-campus housing charge, whichever is higher)
• K–12 tuition (529 only): up to $10,000 per beneficiary, per year (all 529s combined)

Reduce your qualified expenses by: tax-free scholarships/grants, employer or VA education aid, and amounts you use to claim the AOTC/LLC. No double-dipping.

2020 CARES Act note: Emergency Financial Aid Grants were not taxable, and expenses paid with those grants cannot be used for credits/deductions.

Is any of it taxable? (quick logic)

1. Add up your adjusted qualified expenses (after reductions above).
2. Compare to Box 1:
   • If Adjusted QEs ≥ Box 1 → distribution is generally tax-free.
   • If Adjusted QEs < Box 1 → part of Box 2 (earnings) is taxable (and may face 10% additional tax).

Quick formula for taxable earnings
Taxable earnings = Box 2 × (Non-qualified portion ÷ Box 1)
Non-qualified portion = Box 1 − Adjusted qualified expenses − any rolled/ transferred amounts

Where to report (if anything is taxable)

• Nontaxable distributions: no entry on your federal return; just keep records.
• Taxable portion: Include as wages/other income (Form 1040/1040-SR—enter “SCH” and the amount on the dotted line next to line 1 if not on a W-2).
• 10% additional tax: Use Form 5329, unless an exception applies (death, disability, scholarship up to amount received, U.S. military academy attendance).

Step-by-step (high level)

1. Gather docs: Form 1099-Q(s), 1098-T, and receipts for books, supplies, R&B, computer, internet.
2. Confirm recipient: Report on the return of the person whose SSN is on the 1099-Q.
3. Compute adjusted qualified expenses: Subtract tax-free aid and any expenses you’ll use for AOTC/LLC.
4. Run the comparison (Adjusted QEs vs. Box 1) and, if needed, apply the taxable earnings formula.
5. Report any taxable amount and add Form 5329 if the 10% applies.
6. Keep records even if everything is tax-free (the IRS gets a copy of 1099-Q and may ask).

Timing tip: You can match a distribution to expenses paid in the same calendar year or for an academic period beginning in the first 3 months of the next year—document clearly.

Late or amended returns (2020)

• If you discover an error or get a corrected 1099-Q after filing, use Form 1040-X.
• Usual window: 3 years from filing (or 2 years from paying tax), whichever is later.
• Include an explanation and your expense worksheet/receipts.

Common mistakes (and easy fixes)

• Assuming it’s all taxable: Only earnings can be taxable, and only when expenses don’t cover the distribution.
• Double-dipping expenses: You can’t use the same dollars for a 529/ESA exclusion and an education credit.
• Wrong return: Report it on the return of the person shown as recipient on Form 1099-Q.
• Forgetting to reduce expenses by tax-free aid and CARES grants.
• Timing mismatches: Distributions and expenses must align by year (or early next-year window).
• Weak records: 1098-T often doesn’t list every qualified expense—keep invoices, housing contracts, and proof of payment.

Quick FAQs

Do I report a fully qualified (tax-free) 1099-Q?
No federal entry required—keep records.

Can 529 funds cover off-campus room & board?
Yes, up to the COA housing allowance published by the school (or actual on-campus housing charge if higher), and only if half-time+.

Who reports—parent or student?
Whoever’s SSN is in the 1099-Q recipient box.

Are there penalty exceptions?
Yes: death, disability, scholarship (up to the amount), or attendance at a U.S. military academy.

What if amounts on 1098-T differ from what I paid?
Use actual payments and receipts; 1098-T can miss items.

State considerations

Some states offer 529 deductions/credits and may recapture them if funds are used for non-qualified expenses. Check your state’s rules.

Bottom line: Match distributions to adjusted qualified expenses, don’t double-dip with credits, and keep tidy records. If a slice of earnings is taxable, report it—and check if a 10% exception saves you the penalty.

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