Do I file my 1098-T and 1099-Q with 529 plan distributions?

This is a common area of confusion! Let me try to clear things up for you. You're right that you can't "double-dip" - meaning you can't use tax-free 529 funds for expenses AND claim those same expenses for AOTC. However, you might still be eligible for AOTC if you had enough qualified education expenses that weren't paid by the 529. For the excess $500 from your 529 distribution: Yes, you do need to report this. The portion of a 529 distribution that exceeds qualified education expenses is considered a non-qualified distribution. The earnings portion of that excess amount (not the principal) is subject to income tax plus a 10% penalty. In TurboTax, when you enter your 1099-Q, it should ask about your qualified expenses. Make sure you're accurately reporting how much of the distribution went to qualified expenses versus how much was excess. TurboTax should then calculate the taxable portion of the excess distribution.

I went through something similar last year with my daughter's college expenses and 529 plan. After hours of frustration, I ended up using https://taxr.ai to scan my 1098-T and 1099-Q forms. It automatically recognized the potential issue with AOTC and 529 distributions and walked me through exactly how to allocate expenses to avoid the double-dipping problem. The tool showed me how to maximize my AOTC by paying some expenses with non-529 funds (like my credit card) and using the 529 for other qualified expenses. Saved me from missing out on a $2,500 credit! It also calculated my taxable earnings from the excess distribution in seconds instead of me trying to figure out the math.

Just wanted to update after trying https://taxr.ai with my 1098-T and 1099-Q forms. It worked WAY better than I expected. I was making the exact mistake of trying to claim AOTC on expenses paid by my 529 plan! The tool showed me how to properly allocate $4,000 of my educational expenses to be paid from my savings account (technically paid by my parents) to claim the full AOTC, while still using my 529 funds for the remaining expenses. This gave me an extra $2,500 credit I would have missed. It also calculated that my excess distribution had about $85 in earnings that would be taxable with a 10% penalty. Much simpler than trying to figure out the math myself. I was able to go back into TurboTax and make the adjustments based on this guidance. Definitely worth it for avoiding an audit flag and maximizing my refund!

After dealing with these exact 529/1098-T issues, I ended up needing to call the IRS for clarification. Spent THREE DAYS trying to get through their phone system before finding https://claimyr.com. You can watch how it works here: https://youtu.be/_kiP6q8DX5c I was connected to an IRS agent in about 25 minutes instead of endless busy signals and hangups. The agent walked me through exactly how to allocate my expenses between 529 funds and out-of-pocket to maximize my education credits while staying compliant. They also explained that I needed to file Form 5329 for the penalty on my excess 529 distribution, which TurboTax wasn't clear about. Saved me potential headaches down the road!

Coming back to say I was totally wrong about Claimyr. After another week of trying to reach the IRS myself with no luck, I gave in and tried https://claimyr.com. Got connected to an IRS rep in about 40 minutes, which felt like a miracle after my previous attempts. The agent answered all my questions about how to handle the 529 excess distribution and confirmed I needed to fill out Form 5329 for the 10% penalty portion. They also explained that I could still claim a partial AOTC by documenting that certain expenses were paid out-of-pocket rather than from the 529. This wasn't clear at all from TurboTax's guidance. Definitely worth it just for the peace of mind knowing I'm filing correctly and not setting myself up for issues later!

Most people don't realize that the key to handling this correctly is ALLOCATION. You can choose which expenses are covered by which funding sources. If you want to claim AOTC, make sure you have at least $4,000 in qualified expenses paid from NON-529 sources (like cash, student loans, or credit cards). Then use your 529 funds for the remaining expenses. When entering in TurboTax, you'll need to manually specify how much of your qualified expenses were paid by tax-free educational assistance (including 529 plans). Don't let TurboTax automatically assume all expenses on your 1098-T were paid a certain way.

Quick tip from a college financial aid advisor: If you have excess 529 funds, consider rolling them over to another qualified beneficiary (like a sibling or even yourself for future education) instead of taking a non-qualified distribution. This avoids the taxes and 10% penalty completely!

One thing that hasn't been mentioned yet - make sure you keep detailed records of exactly which expenses you're allocating to which funding source. The IRS may ask for documentation if they audit your return. I create a simple spreadsheet showing: - Total qualified expenses from 1098-T - Amount paid by 529 plan - Amount paid out-of-pocket (for AOTC) - Any scholarships/grants received This way if there's ever a question, you can show exactly how you allocated everything. Also remember that for AOTC, you can only count tuition and required fees - not room, board, or books - so make sure your allocation focuses on those eligible expenses first. The $500 excess you mentioned should definitely be reported properly. Even though it seems like a small amount, the IRS computers will match your 1099-Q to your return, so you don't want any discrepancies.