Does Your Child Need to File as a Result of a Distribution from a Qualified Tuition Program? By Carolyn Flaherty

Section 529 Plans, also known as Qualified Tuition Programs or QTP, have become extremely popular over the course of the previous decade. In many cases, the plans were set up so that a dependent child is listed as the owner and beneficiary of a plan. Therefore, when distributions are made, the child receives a Form 1099Q from the educational institution in their social security number. The Form 1099Q is also furnished to the IRS.

Distributions are generally fully excludable from taxable income if they do not exceed qualified higher education expenses. If distributions exceed qualified expenses, the excess (less original basis) is includable as taxable income to the recipient. Qualified higher education expenses include tuition, fees, books, supplies, equipment required for enrollment or attendance, expenses for special needs services and room and board costs for students who are at least ½ time students.

The question arises, if a taxpayer, who is not otherwise required to file a tax return (due to minimal amounts of reportable income), receives a Form 1099Q distribution that is fully excludable under the guidelines above: does the distribution cause the taxpayer to be required to file?

The correct answer is somewhat inconclusive at this time as the IRS has not perfected their matching program when it comes to 1099Q’s. Reportable/Includable Income and taxable income are two different things in the eyes of the tax law. Code Section 529(c)(3)(A) asserts that distributions for a QTP are INCLUDABLE in the recipient’s income under the Code Section 72 rules to the extent not excluded under any other Code provision. Therefore, though the issue is somewhat ambiguous, it seems that distributions are indeed income and hence reportable but not taxable assuming they meet the education requirements above.

Furthermore, because the IRS is provided a copy of Form 1099Q, they will match the form to the recipient’s social security number. If no return is filed, the IRS may generate a notice of deficiency. To avoid unnecessary complications and dealings with the IRS, our office has made it a policy to file a return for the student when these circumstances arise.