Form 1099-Q (2010): Reporting Qualified Education
Program Distributions
Purpose
Form 1099-Q reports distributions from Section 529 qualified tuition programs and Coverdell
Education Savings Accounts. For the 2010 tax year reporting, payors must distinguish between basis and earnings, report trustee-to-trustee transfers separately, and apply special rules when designated beneficiaries change or are not family members. A caution regarding Coverdell ESA fair market value reporting applies uniquely to 2010 distributions.
Steps for Completion (2010 Tax Year)
- Verify Distribution Source Classification in Box 5: Determine whether the distribution
source is a private qualified tuition program, state qualified tuition program, or Coverdell
ESA. Check the appropriate box in Box 5, as this classification determines whether the payer must report basis and earnings separately or may report fair market value as of
December 31, 2010.
- Enter Gross Distribution Amount in Box 1: Report in Box 1 the gross distribution
amount, including in-kind distributions paid during 2010. This amount equals the sum of
Box 2 (earnings) and Box 3 (basis) for standard reporting.
- Apply CESA FMV Reporting Option for 2010 Distributions: For Coverdell ESA
distributions only in 2010, payors may elect to report the fair market value of the account as of December 31, 2010, in place of separate basis and earnings. When payors use this option, recipients must use the Coverdell ESA—Taxable Distributions and Basis worksheet in Publication 970 to calculate taxable amounts. Leave boxes 2 and 3 blank when reporting fair market value, and enter the amount labeled "FMV" in the blank box below boxes 5 and 6.
- Report Earnings Portion in Box 2: Enter in Box 2 the earnings portion of the
distribution for standard reporting. Under Coverdell ESA rules in 2010, earnings are taxable if the designated beneficiary changed and the new beneficiary is not a family member or is over age 30, except for special-needs beneficiaries.
- Report Basis in Box 3: Enter in Box 3 the basis (contribution) portion for standard
reporting. This represents the recipient's after-tax contributions and is not taxable upon distribution. The amount in Box 3 must equal Box 1 minus Box 2 when the basis is reported.
- Check Box 4 for Trustee-to-Trustee Transfers: Mark Box 4 if a trustee-to-trustee
transfer occurred between two qualified tuition programs, between two Coverdell ESAs, or from a Coverdell ESA to a qualified tuition program. Certain Coverdell ESA transfers may leave this box blank per 2010 instructions if the payer does not have records showing the gross distribution was a trustee-to-trustee transfer.
- Check Box 6 for Non-Beneficiary Recipients: Mark Box 6 if the recipient is not the
designated beneficiary. This flag alerts recipients that special income-inclusion and 10 percent penalty rules under Section 530 (Coverdell ESA) or Section 529 (qualified tuition program) may apply based on the relationship and age of the new beneficiary.
- Assign Distribution Codes When Applicable: You may, but are not required to, assign
one of six 2010-specific distribution codes in the space below Boxes 5 and 6
○ Code 1: Distributions (including transfers)
○ Code 2: Excess contributions plus earnings taxable in 2010
○ Code 3: Excess contributions plus earnings taxable in 2009
○ Code 4: Disability
○ Code 5: Death
○ Code 6: Prohibited transaction
- Complete Payer Information in Header Section: Report the payer/trustee's nine-digit
federal identification number and complete name, street address, city, state, and ZIP code in the header section. For qualified tuition programs, enter the program's employer identification number and name.
- Complete Recipient Information: Report the recipient's name, street address, city,
state, ZIP code, and social security number, individual taxpayer identification number, or adoption taxpayer identification number. Include any account number assigned by the
payer if you maintain multiple accounts for the recipient.
- Furnish Copy B by January 31, 2011: Deliver Copy B to the recipient by January 31,
2011, which represents the 2010 tax year recipient deadline. This statement must contain all required information to help recipients properly report distributions on their tax returns.
- File Copy A by Applicable IRS Deadline: Submit Copy A to the IRS by February 28,
2011, for paper filing. If filing electronically, use software that generates a file compliant with Publication 1220 specifications and submit by the extended due date of March 31,
2011.
Year-Specific 2010 IRS Updates and Guidance
- Coverdell ESA Fair Market Value Reporting Option: For distributions during 2010,
payors may choose to report the Coverdell ESA's fair market value as of December 31,
2010, instead of on an itemized basis and earnings. Recipients then use the Publication
970 worksheet to determine taxable amounts. This alternative reporting method applies uniquely to the 2010 tax year for Coverdell ESA distributions other than earnings on excess contributions.
- Distribution Codes 2 and 3 Distinction: Code 2 identifies excess contributions plus
earnings taxable in the current year (2010), while Code 3 identifies excess contributions plus earnings taxable in the prior year (2009). Payors must select the correct code to clarify the tax period in which amounts became taxable.
- Designated Beneficiary Relationship Rule for Coverdell ESAs: Under the 2010
Coverdell ESA distribution rules, earnings are taxable if the new designated beneficiary is not a family member of the prior beneficiary or if the new beneficiary is over age 30 and not a special-needs individual. Family members include the beneficiary's spouse, children, siblings, parents, and other relatives as defined in the instructions.
- Prohibited Transaction Code 6: The 2010 instructions include Code 6 to identify
distributions arising from a prohibited transaction within the Coverdell ESA or qualified tuition program. Payors must verify whether any distribution stems from a violation before assigning this code to alert recipients of potential tax consequences properly.
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