Thanks for this advice! I'm still waiting on those statements from T-Rowe, but this gives me a good framework for organizing everything. Do you think I should attach some kind of explanation with my tax return explaining why I'm reporting different figures than what's on the 1099-Q?

You don't need to attach an explanation to your regular tax return. When you report a distribution from an education account on Form 8863, you're only reporting the taxable portion anyway. If you're concerned, you can certainly keep a written explanation with your tax records that you could provide in case of questions. But don't send additional documentation unless specifically requested by the IRS.

I had this issue spanning 4 years of distributions. What worked for me was calculating the initial ratio of contributions to earnings before ANY distributions started, then applying that same ratio to all distributions. So if your account was 80% contributions and 20% earnings when you first started taking money out, you'd consider all distributions to be split that same way.

Thanks, that makes sense. I think I've actually been doing it wrong then. I've been trying to recalculate the ratio each year which has been a total nightmare with all the market fluctuations. I'll try using the initial ratio approach instead.

But don't you have to pay quarterly estimated taxes if you're anticipating a tax bill? So you couldn't really wait a full year to make that payment, right?

You're right that you might need to make quarterly estimated payments - it depends on your total expected tax liability and other withholdings. If you have sufficient withholding from other sources (W-2 job, etc.), you might not need to make estimated payments. Even with quarterly payments though, you still have the benefit of having the money available to you for some period of time versus having it immediately applied to next year's taxes. You could potentially use it for higher priority needs before making those estimated payments when they're actually due.

I don't think most states pay interest unless they're really late with the refund processing though. Did you have to wait an unusually long time?

Is there anything specific to watch for to know if they're getting their money's worth? What kinds of questions should I ask the preparer?

Watch for how much time they spend asking questions about your parents' situation - good preparers should be inquiring about life changes, medical expenses, charitable donations, and changes in income sources. They should explain why they're making certain choices on the return. Ask what specific deductions or credits they're applying that might be missed with self-filing. Also ask if there are any tax planning suggestions for next year - good preparers offer this. If they're just entering W-2s and a few 1099s without much discussion, your parents are probably overpaying.

This! I tried forcing my dad to file online and he made a mistake that cost way more than what he would have paid a professional. Sometimes it's not worth the battle.

This explanation makes a lot of sense - thank you! So essentially, my accountant only did half the correct accounting (increasing my capital account) but missed recording the actual liability on the business books? If I understand correctly, I should be able to correct this going forward by properly recording the liability now, which would reduce my capital account but allow the business to pay off the debt as a legitimate business expense without triggering capital gains? Would this correction potentially trigger any penalties or raise audit flags?

You've got it exactly right. Your accountant increased your capital account but failed to record the corresponding liability on the business books, which created this imbalance. Correcting this going forward is possible by properly recording the liability now. This would reduce your capital account (essentially correcting the artificial inflation), but then allow the business to properly pay off the debt as a legitimate business expense without triggering capital gains or being treated as a distribution to you. This type of correction typically wouldn't trigger penalties if properly disclosed as an accounting method change using Form 3115. The IRS recognizes that accounting methods sometimes need correction, and they provide this form specifically for that purpose. It's considered a voluntary correction rather than something that raises audit flags. Include a clear explanation of the circumstances of the inheritance and how the debt was always intended to be a business obligation based on your agreement. Having good documentation of the original intent (like your contract with the family member) will strengthen your position if there are any questions.

This makes sense, but wouldn't reclassifying the debt now as a business liability be better for tax purposes? Even if it means adjusting the capital account? I thought business interest expense was deductible while personal loan interest isn't (or is limited).

Do you meet with your accountant in person? And how early do you need to book them? I heard good accountants get fully booked way before April.

I started with in-person meetings but now we do everything electronically. I send her my documents through her secure portal, and we have a video call to discuss anything unusual about my tax situation that year. You're absolutely right about booking early. I contact her in January to get on her schedule, and even then she's getting busy. By March, she's not taking new clients for the current tax season. Good accountants definitely book up fast, so if you're considering one, don't wait until April!

That's my fear too. Did H&R Block charge you even though they didn't really help?