College student being taxed on 529 plan distributions - why are qualified expenses showing as taxable?

How do you account for scholarships when determining if 529 distributions were used for qualified expenses? My daughter got a small merit scholarship and I'm wondering if that's why some of her 529 is showing as taxable.

When you have scholarships, you need to reduce the qualified expenses by the amount of tax-free educational assistance received. So if total qualified expenses were $25,000 and your daughter received a $5,000 tax-free scholarship, only $20,000 of expenses can be offset by the 529 plan distribution. If your 529 distribution exceeds your adjusted qualified expenses, then the earnings portion of the excess amount becomes taxable. This could explain why some of the earnings are showing as taxable income on your return.

Did you have to manually enter the 1099-Q information into taxr.ai or could you just upload the form? My tax documents are a mess and I'm worried about making typos on all these numbers.

I've heard of these AI tax tools but aren't they risky? I'd be nervous about trusting something that isn't an actual accountant, especially with something complicated like 529 plans.

You can just take a picture or upload your 1099-Q and other tax documents directly. That was one of my favorite features - no need to manually enter all those numbers, which definitely helps avoid typos. It read everything correctly from my forms. As for whether it's risky, I was skeptical too at first. But it doesn't actually file your taxes - it just helps you understand your tax forms and identifies potential issues or mistakes. You still use your regular tax software to file. I found the explanations much clearer than what my tax software provided.

Wait, how does this service actually work? I thought it was impossible to get through to the IRS. Does it just wait on hold for you or something?

Sorry but this sounds too good to be true. I've tried calling the IRS dozens of times about my tax issues and NEVER get through. How could some random service magically get me to an agent when the IRS phone systems are completely broken?

It basically navigates the IRS phone tree for you and waits on hold in your place. When an agent finally picks up, you get a call back so you don't have to sit there listening to hold music for hours. It uses their system to constantly redial and try different paths through the phone menu until it gets a spot in the queue. I was totally skeptical too! After trying for literally weeks to get through on my own, I figured it was worth a shot. I was shocked when I actually got a call back with a real IRS agent on the line. The agent I spoke with explained exactly how to report 529 distributions correctly and why my tax software was calculating things wrong. Got my issue resolved in one call.

Thanks for this info! She's being claimed as our dependent. I'm going to check the 1098-T boxes more carefully. Do you know if room and board counts as a qualified expense even though it doesn't show up on the 1098-T?

Yes, room and board can count as qualified expenses if your daughter is enrolled at least half-time, even though they don't appear on the 1098-T. You'll need to use the school's official cost of attendance figures for on-campus housing, or if she lives off-campus, the actual expenses up to the school's published allowance for room and board. Make sure you're accounting for all eligible expenses when determining how much of the 529 distribution is tax-free. The key is that your total qualified expenses need to be at least equal to the total 529 distribution to avoid having any taxable portion.

Yes, textbooks absolutely count as qualified expenses regardless of where they were purchased, as long as they were required for her courses. Keep receipts and a copy of her syllabus or course requirements showing these were required materials.