Published on: September 27, 2021 Last modified: October 6, 2021

All You Need to Know About IRS Form 1099-Q for Educational Savings Plans

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    Education continues to play a critical role in society today – almost all professionals in the world had to go through some amount of formal education. This means you’re unlikely to achieve your dream of becoming a plastic surgeon or pilot if you don’t invest in your education.

    It will, however, take you a lot of time and money before you can realize your dreams. Some people may easily fund their education from primary school to college without challenges. Others need to plan for their primary, secondary, and even higher education years in advance.

    One way to do this is by setting up a tuition program such as a Coverdell Education Savings Account or a 529 plan. These plans can help you or your beneficiaries fund their education up to college level, depending on the type of plan you choose.

    This guide will ready you for dealing with Form 1099-Q once you start making withdrawals from such a plan or if you are a beneficiary of one. It’s also important that you understand the tax implications of such programs.

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    An Overview of Form 1099-Q?

    Form 1099-Q is a tax form from the Internal Revenue Service listing distributions from a qualified education program. You can set up a 529 plan or a Coverdell ESA to fund your education or that of a beneficiary. The IRS will then send you Form 1099-Q if you withdraw funds from the plan to pay for eligible school expenses.

    There are three parts to Form 1099-Q. They include:

    Withdrawals

    Box 1 highlights any withdrawals you make during the year to cover your education expenses.

    Earnings

    Box 2 shows any earnings or profits that have accrued from the initial amount of funds invested.

    Tax Basis

    Box 3- The third box totals withdrawals minus earnings to calculate what the IRS will consider as the basis for taxation.

    Other important information you must check in the form includes whether you made a transfer to another tuition plan. The form will also note the program you subscribe to and whether the distribution went to another person.

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    Who Can File Form 1099-Q?

    You will get Form 1099-Q from the bank or the person who manages your education plan. The form will be sent your way if you are the one who set it up and make regular contributions to it.

    It is also worth noting that you can set up an account to assist another person through their schooling journey. The beneficiary, in this case, will have little control of the funds and will not be liable for any tax implications. 

    There are certain eligibility rules when it comes to these plans. Most institutions, including colleges, vocational institutions, universities, and other tertiary schools, are eligible for this program. They must be qualified to enroll in student aid programs that the U.S. Department of Education administers. 

    You can also use the distributions from your tuition plan to pay fees for an eligible secondary or elementary school. This is capped at $10,000, however.

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    Eligible Education Expenses

    It is also essential that you use any distributions you get for eligible education expenses if you do not want to be taxed. These qualified expenses should be related to enrolling or completing your education. They include:

    • Paying tuition fees
    • Getting books that are necessary for your course
    • School supplies
    • Room and board if you are even a part-time student
    • Off-campus housing may be eligible but capped to an equivalent cost of on-campus housing 
    • School computer and other related equipment
    • Software that you will use for educational purposes
    • Any expenses you incur during enrollment 

    There is some gray area in these eligibility requirements, so it’s a good idea to consult with a tax expert to avoid unexpected taxes on an expense that doesn’t qualify.

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    Tax Implications to Consider When Filing Form 1099-Q

    The IRS does not expect you to pay taxes if the distribution is less than your educational expenses. You may have to pay some taxes on the distributions you receive, but only if they exceed your expenses. 

    It is worth noting that you cannot claim any deductions or tax credits on such expenses if you use money from your 529 or Coverdell plan. You will get form 1099-Q any year that you make a withdrawal or when you transfer funds between two plans. 

    Contact Silver Tax Group

    Our Tax Experts Can Help You With Form 1099-Q

    Most people have future aspirations, and one way to achieve your dreams is by getting a good education. Education savings plans can make that possible, but it’s important to understand their tax implications.

    Silver Tax Group has a team of experienced tax professionals who can work with you to ensure you understand the intricacies of Form 1099-Q  and education savings plans. Our tax attorneys will guide you to the best tax outcomes and a savings plan that can fund a good education for you or your child. Just contact us today to ask questions or talk with an expert. 

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