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Publication 970

Are Distributions Taxable?(p58)

The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in income. This is a return of the investment in the plan.
The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution, later).

Earnings and return of investment.(p58)

You will receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2016. The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Form 1099-Q should be sent to you by January 31, 2017.

Figuring the Taxable Portion of a Distribution(p58)

To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses.

Adjusted qualified education expenses.(p58)

This amount is the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes:

Taxable earnings.(p59)

Use the following steps to figure the taxable part.
  1. Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.
  2. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Form 1040 or Form 1040NR, line 21.

Example 1.(p59)

In 2009, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Over the years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2016, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. She paid her college expenses from the following sources.
 Gift from parents$1,600 
 Partial tuition scholarship (tax free)3,100 
 QTP distribution5,300 
Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance.
 Total qualified education expenses$8,300 
 Minus: Tax-free educational assistance−3,100 
 Equals: Adjusted qualified
 education expenses (AQEE)
Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.
Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Sara figures the taxable part of the distributed earnings as follows.
 1.$950 (earnings)×$5,200 AQEE   

$5,300 distribution
   =  $932 (tax-free earnings)
 2.$950 (earnings) − $932 (tax-free earnings) 
   =  $18 (taxable earnings)
Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses.

Coordination With American Opportunity and Lifetime Learning Credits(p59)

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.

Example 2.(p59)

Assume the same facts as in Example 1, except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).
 Total qualified education expenses$8,300 
 Minus: Tax-free educational assistance− 3,100 
 Minus: Expenses taken into account
 in figuring American opportunity credit
− 4,000 
 Equals: Adjusted qualified
 education expenses (AQEE)
The taxable part of the distribution is figured as follows.
 1.$950 (earnings)× $1,200 AQEE  
$5,300 distribution
   =  $215 (tax-free earnings) 
 2.$950 (earnings) − $215 (tax-free earnings) 
   =  $735 (taxable earnings)
Sara must include $735 in income (Form 1040, line 21). This represents distributed earnings not used for adjusted qualified education expenses.

Coordination With Coverdell ESA Distributions(p59)

If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.

Example 3.(p59)

Assume the same facts as in Example 2, except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions.
 $1,200 AQHEE×  $700 ESA distribution 
$5,300 total distribution
 $1,200 AQHEE× $4,600 QTP distribution
$5,300 total distribution
Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042.
Note.If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7 under Coordination With Qualified Tuition Program (QTP) Distributions.

Coordination With Tuition and Fees Deduction(p60)

A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits.

Losses on QTP Investments(p60)

If you have a loss on your investment in a QTP account, you may be able to claim the loss on your income tax return. You can claim the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account. You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit.
The aggregation rules that applied if you had distributions from more than one QTP account during a year were eliminated for distributions after 2014. For more information, see Notice 2016-13 available at

Additional Tax on Taxable Distributions(p60)

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.


The 10% additional tax doesn't apply to the following distributions.
  1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.
  2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.
  3. Included in income because the designated beneficiary received:
    1. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);
    2. Veterans' educational assistance (see Veterans' Benefits in chapter 1);
    3. Employer-provided educational assistance (see chapter 11); or
    4. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
  4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.
  5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).
Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.

Figuring the additional tax.(p60)

Use Part II of Form 5329 to figure any additional tax. Report the amount on Form 1040, line 59, or Form 1040NR, line 57.