Form 1099-Q: Payments from qualified education programs

What is Form 1099-Q? 

IRS Form 1099-Q reports distributions from educational savings accounts (ESAs) and qualified tuition programs (QTPs) to the IRS.

The most common ESAs and QTPs are Coverdell accounts and 529 Plans, respectively. If you have one, or something similar, and withdraw or transfer funds, it’s called a distribution. The financial institution that manages your ESA or QTP reports your distributions to the IRS using Form 1099-Q. You, as the account holder, also receive a copy of the form.

You will also get a 1099-Q if you roll (transfer) money to another account from your ESA or QTP, or contribute more to your account than the IRS allows.

When will I receive my Form 1099-Q? 

The institution that manages your ESA or QTP must file Form 1099-Q with the IRS and send you a copy by January 31 of the tax filing year. They will send Form 1099-Q for the 2023 tax year by January 31, 2024. It can take up to two weeks for you to receive the form in the mail.

How to use Form 1099-Q

You do not need to attach Form 1099-Q to your federal or state tax return. In fact, if your distributions are not taxable, you don’t need to include them on your tax returns at all.

If all or part of your distributions are taxable, as explained below, you need to report the taxable amount as “other income” on Schedule 1, attached to your Form 1040, on your federal tax returns. How to include it on state tax returns varies by state. The Tax Pros at Jackson Hewitt understand what you need to report and know how to do it correctly.

You should always keep your 1099-Q with your tax records in case you need to refer to it later.

Distributions reported on Form 1099-Q

For accounts other than Coverdell ESAs, the first three boxes on Form 1099-Q reveal the total amount of distributions you took from your account.

• Box 1 reports total gross distributions—the total amount of money distributed from your account over the past year.
• Box 2 reports the amount of your distributions that came from earnings on money contributed to the account by you or others. (Earnings can occur when you receive interest payments or invest your money in mutual funds or other options.)
• Box 3 reports the amount of your distributions that came from your original contributions, known as your basis.

Box 1 should equal Box 2 plus Box 3. If it does not, you need to contact your financial institution and ask for a corrected Form 1099-Q.

If you have a Coverdell ESA, your financial institution does not need to differentiate between basis and earnings in Boxes 2 and 3 (unless you have earnings on excess contributions). Instead, as of 2019, they are likely to report the Coverdell ESA’s total fair-market value at the end of the tax year in the blank space below Boxes 5 and 6. You or your tax preparer need to calculate earnings and basis manually, using the Coverdell ESA basis worksheet in IRS Publication 970. 

If the distribution reported in Box 1 is for the full value of your account, it is a final distribution that closes the account. If you close your account when your basis is worth less than your original contributions—for example, you lost money on your investments—you may be able to claim a full or partial capital loss on your taxes. 

Includable and excludible portions of ESA and QTP earnings 

How much of your distributions do you need to include as income on your taxes? The question is simpler than the answer.

Distributions of your basis—the money you contributed to your account—are not taxable. That is, they’re not considered “includable” as taxable income. (If somebody else makes contributions as a gift, they might be subject to gift taxes. That’s a separate topic.)

However, you may need to include distributions of your earnings, Box 2, as income on your taxes. It depends on when you withdrew the funds, and what you used the money for. The type of account is also a factor. Box 5 shows whether the account is a Coverdell ESA or a private or state QTP established under Section 529 or 530 (aka, a 529 plan). 

Generally, you do not need to include distributions from earnings in your gross income on your tax return, if any of the following apply: 

1. You used the earnings to pay for eligible educational expenses, such as tuition.
2. You transferred earnings between trustees, such as from a parent to a child when both are trustees on the account(the transfer is an excludable distribution).
3. You rolled earnings over to another qualified education program, or an ABLE account, which is a tax-exempt savings account for disabled persons.

There are some nuances to these guidelines:

What’s taxable from QTP earnings?

If you have a QTP like a 529, you need to include the amount of earnings in Box 2 of your 1099-Q on your taxes if the same beneficiary had more than one transfer or rollover from their account(s) within any 12-month period.

You also must include the earnings in Box 2 in your income if the designated beneficiary changed to someone outside your family. In this case, the IRS definition of “family” includes spouses, children, parents, in-laws, aunts, uncles, and cousins, among others.

What’s includable from Coverdell ESA earnings?

If you have a Coverdell ESA, you need to include the earnings in Box 2 of your 1099-Q on your taxes, if the account is rolled over to a new beneficiary who is not a family member. If the new beneficiary is over age 30 and does not have special needs, the earnings are includable, regardless of your relationship to them.

All includable QTP or ESA earnings may be subject to an additional 10% tax, if you used the money for something other than eligible educational expenses.

Distributions. Rollovers. Transfers. Earnings. Basis. Qualified expenses. Includable and excludible...it can all get a bit intimidating. Jackson Hewitt Tax Pros can make sense of it all and make sure you get all the tax advantages available to you.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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