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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29577
Experience:  Taxes, Immigration, Labor Relations
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I took a distribution on an Edvest account (like a 529

Customer Question

Hello, I took a distribution on an Edvest account (like a 529 account) for my son's college tuition. It was about $6,000, but $2,000 of it was earnings made on the account. The IRS wanted me to pay taxes on the $2,000. I pointed out that it was supposed to be tax free, and they finally agreed. My question, however, is I want to take another distribution and avoid the hassle. Where do I report earnings on Edvest such that the IRS won't ask for taxes on it?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. According to the IRS - do not report tax-free distributions (including qualifying rollovers) on your tax return.A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the ben-eficiary's adjusted qualified education expenses for the year.You should receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2014. The amount of your gross distribution (box 1) shown on each form will be divi-ded between your earnings (box 2) and your basis, or re-turn of investment (box 3).The taxable amount must be reported on Form 1040, line 21.Please be aware of additional Tax on Taxable Distributions - generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.Use Part II of Form 5329, to figure any additional tax. Report the amount on Form 1040, line 59.Let me know if that answered your question.
Customer: replied 2 years ago.
"Do not report tax-free distributions," it all comes down to that. For 2014, I received a Form 1099-Q. Gross Distribution: $12,102.05.Earnings: $3,524.43. Basis: $8,577.62. I thought all investment earnings were tax free if used for education expenses. There is no doubt that this was applied to legit education expenses, I can document it. But I didn't, because I didn't think I had to report them. $3,524.43 does not seem like a princely sum, it does not seem I would exceed any limits. This first came up in 2012, same scenario, got a letter from the IRS asking for payment on the earnings portion. I wrote a letter documenting the education expenses, they agreed no tax was due. I was hoping to avoid getting a similar letter in 2014, but maybe I'm just going to have to go through the same process again. Anyway, do you see anything in what I've written that would trigger why I'm getting letters asking for taxes. Does everyone have to go through this?
Expert:  Lev replied 2 years ago.
"Do not report tax-free distributions" - that is correct statement.
Please see for reference IRS publication 970 regarding distributions from educational accounts.
page 53 - Tax-Free Distributions
Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Do not report tax-free distributions (including qualifying rollovers) on your tax return.
http://www.irs.gov/pub/irs-pdf/p970.pdf
However - the IRS MIGHT ask supporting documents regarding your educational expenses.
So in your situation - if distributions were used for qualified education expenses - these are tax free - and you woudl need to provide supporting documents for your position - and NOT report that distribution on your tax return.
.
If you expect similar auditing letters in future - you may simply attach a statement with your tax return - and that will prevent such proposed assessment letters.
Otherwise - if income is not taxable - no need to report it on your tax return.