Taxability of Earnings on a 529 Plan distribution

[AnmarieA]

I have a client who took out $10K from their child's 529 plan that was funded by various sources (gifts, etc) over the years. The $10K was to pay 100% of the bill for the University which they did paid in full. After the distribution the child was awarded additional scholarships amounting to $2,000 so the University later reimbursed the parent for this over-payment instead of applying to the next semester invoice. Hence the Form 1098-T showed in box 1 and box 5 lower amounts due to the $2K reimbursement and higher scholarship. Now the 1099-Q is less than the 1099-T and the taxpayer is being taxed on 100% of the interest earned on the 529 account. Is there a way to correct this in Proconnect as the taxpayer paid the Tuition bill in full and was later refunded after the fact. How could have the taxpayer avoided this situation?

Your feedback is welcome. Thank you.  

[TaxGuyBill]

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@AnmarieA wrote:

After the distribution the child was awarded additional scholarships amounting to $2,000

Hence the Form 1098-T showed in box 1 and box 5 lower amounts due to the $2K reimbursement and higher scholarship.

Now the 1099-Q is less than the 1099-T and the taxpayer is being taxed on 100% of the interest earned on the 529 account.

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Box 1 should not have changed.

Only $2000 would be subject to prorated tax, but it wouldn't be 100% (it would be prorated based on earnings versus Basis).

But take a step back.  If there were at least $2000 of qualified Room and Board expenses, none of it would be taxable.

As for your question about how to enter it into ProConnect, unfortunately, I can't help you with that part.