Texas Guaranteed Tuition Plan Distributions - IRS FORM 1099-Q
1. Why did I receive a 1099-Q?
Due to Internal Revenue Service (IRS) reporting requirements, 529 plans, such as the Texas Guaranteed Tuition Plan (TGTP), must report all distributions on a 1099-Q.
For TGTP, a distribution includes the following:
- Payment of tuition and required fees to a college or university on behalf of a beneficiary
- Scholarship refund to a purchaser
- Cancellation refund to a purchaser
2. In whose name and social security number will the 1099-Q be issued?
Based on IRS requirements:
- a) Distributions made to schools on behalf of the beneficiary will generate a 1099-Q for the Student.
- b) Any other distributions, such as scholarships, and cancellation refunds will generate a 1099-Q for the Purchaser (since we must use the Social Security number of the person to whom payment was made).
3. What do I need to do with this 1099-Q?
This form will be used by you or your tax professional in the preparation of your federal income tax return. Generally, a gain will not result in a taxable event as long as you incurred qualifying higher education expenses equal to or greater than the amount of the distributions. However, you cannot use the same higher education expense to qualify for more than one tax benefit. For example, you cannot use the same expenses to qualify for tax-free distributions from both your TGTP contract and a Coverdell Education Savings Account.
A detailed discussion on the taxability of distributions from qualified tuition plans can be found in IRS Publication 970, Tax Benefits for Education. An electronic version of the publication is available on the IRS Web site, or you may request a printed copy by calling 1-800-829-1040.
If you don't have qualified higher education tuition expenses that equal or exceed the amount distributed from your TGTP contract (shown in box 1 of the 1099-Q), you have a non-qualified distribution and must report the earnings from box 2 on line 21 of IRS form 1040. You may also be subject to the 10% additional tax penalty on these earnings. For a detailed discussion of the additional tax, see IRS Publication 970 and the instructions for IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
4. What if I have multiple contracts for one beneficiary?
The earnings reported on your 1099-Q were calculated by aggregating (or treating like a single account) multiple accounts for the same beneficiary and purchaser, as required per IRS regulations.
5. Can you provide me with additional clarification regarding how to calculate my possible tax liability as it relates to my 1099-Q and possible utilization of the Hope Credit or Lifetime Learning Credit?
IRS Publication 970, Tax Benefits for Education, provides in-depth explanations of various calculations. Also, you are not able to use the same qualified higher education expense for both a tax-free distribution from your TGTP contract and also for a Hope or Lifetime Learning Credit (see answer to question 3 above).
6. How are the numbers in box 1, 2, & 3 calculated?
- a) Gross distributions in box 1, represent the total distributions for the current year.
- b) Earnings or (Loss) in box 2, is the difference between what you paid for the hours versus what we paid out for the same number of hours.
- c) Basis in box 3, is the amount you paid for the hours actually distributed.
- d) Basically, box 1 contains the sum of box 2 and box 3.
7. What does it mean if I have a Negative Earnings or Loss and how should I report it on my income tax return?
The Loss or Negative Earnings means you selected a school of exceptional value, which was less than the "Texas Average." A loss will only be reported when all contract hours purchased on all TGTP accounts with the same purchaser and beneficiary have been distributed.
In some cases, you may be able to include these Losses as a Miscellaneous Itemized Deduction in the year the plan is depleted. Losses on qualified tuition plans are discussed in detail in IRS Publication 970. Consult your tax advisor or the IRS for information on whether you can deduct the loss.
8. What if I rolled over the amount distributed by TGTP to another qualified tuition program or 529 plan?
Any amount distributed from a qualified tuition plan is not taxable if, within 60 days from the date of the distribution, it is rolled over (i.e. transferred) to another qualified tuition plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family. Rollovers are discussed in detail in IRS Publication 970. Consult your tax advisor or the IRS for more information on rollovers.
The Texas Guaranteed Tuition Plan (TGTP) cannot provide investment or tax advice, and the foregoing information should not be construed as legal, financial, or tax advice with respect to the consequences for any particular individual as a result of the purchase of or distribution from a TGTP prepaid tuition contract. This information is not a substitute for discussing your particular situation with a tax professional or the IRS.