Posted by Elliot Kravitz, ATP

What is IRS Form 1099Q: Payment of Qualified Education Programs (For Sections 529 and 530)

What is IRS Form 1099Q: Payment of Qualified Education Programs (For Sections 529 and 530)

Everyone that needs to pay for school fees using Coverdell ESA or 529 will likely get Form 1099-Q from the IRS. This reveals the entire withdrawal made in the year to cover your school expenses. While Form 1099-Q reports all the withdrawals made in the year, a part of this money might be taxable. This is a factor of how the money was spent.

Understanding 529 Plans and Coverdell ESAs

A 529 plan alongside a Coverdell ESA provides the same saving plan with similar operations. These accounts are dedicated solely to the beneficiary’s school expenses. A difference between the plan is seen in the type of fees they can take care of. However, taxes affect both plans in the same way.

Some funds are invested by someone or the student personally. Profits from such investments are not subjected to tax. Also, part of such funds used to service educational expenses is not taxed.

What About 1099-Q

The bank or admin in charge of your 529 plan (Coverdell ESA) issues the 1099-Q form. People who own such an account and contribute to it will get the form. If the account is created for someone else's sole purpose, the beneficiary has no say over the account, nor does he concern himself with the tax obligation.

There are three vital information from 1099-Q:

  • Box 1 shows your annual distribution or the withdrawals you made from it.

  • Box 2: reveals part of your distribution: the earning or income of the initial investment.

  • Box 3: shows your basis as part of the expected distribution. We can classify this as part of your distribution, which relates to the original distribution you made to the account.

There is also data on the account type and the amounts that you moved between some tuition plans that were qualified.

Who Can File Form 1099-Q?

Employees and officers in charge of the program set up by state or qualified educational firms can file Form 1099-Q. Anyone who has had a distribution from a 529 plan (a qualified tuition program) can also file Form 1099-Q

A qualified tuition program is an investment account with a tax advantage that helps service the fees of higher education expenses that are qualified. With a 1099-Q, the amount made from the account in the gross distribution for the year in question. The gross distribution is also compared to the educational expenses for the year. 

For a gross distribution that exceeds qualified education expenses, the excess is subjected to tax, which must reflect on the taxpayer's return. For expenses that are more than the distribution, there is a provision for the person to use the excess for an education tax credit.

The beneficiary student gets the 1099-Q provided that the 529 distribution payment went to the school, the loan provider, or the beneficiary. The taxable amount of the distribution will reflect on the beneficiary's tax return. For any distribution used for payment of nonqualified expenses, there will be an income tax alongside a penalty of 10% on the earning part of the withdrawal.

Some people might not be cleared on who can use 1099-Q on their tax return – whether the account owner's recipient (a parent or a relative). The form's recipient, whose social security number reflects on the form, must report 1099-Q on their tax return. There is a significant probability that the recipient or student will not pay any tax on the distribution. If the beneficiary is another person and not the student using the educational savings, this person might pay taxes.



Elliot Kravitz, ATP
Contact Member