Publication 970
taxmap/pubs/p970035.htm#en_us_publink1000178531
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).
taxmap/pubs/p970035.htm#en_us_publink1000178533You will receive a Form 1099Q from each of the programs from which you received a QTP distribution in 2015. 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 1099Q should be sent to you by February 1, 2016 (January 31 is a Sunday).
taxmap/pubs/p970035.htm#en_us_publink1000178534To 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.
taxmap/pubs/p970035.htm#en_us_publink1000178535This amount is the total qualified education expenses reduced by any taxfree educational assistance. Taxfree educational assistance
includes:
taxmap/pubs/p970035.htm#en_us_publink1000178540Use the following steps to figure the taxable part.
 Multiply the total distributed earnings shown on Form 1099Q, 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.
 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.
taxmap/pubs/p970035.htm#en_us_publink1000178541In 2008, 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 2015, 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 distribution  5,300  
   
Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any taxfree educational
assistance.
 Total qualified education expenses  $8,300  
 Minus: Taxfree educational assistance  −3,100  
 Equals: Adjusted qualified
education expenses (AQEE)
 $5,200  
Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be
taxable.
Sara's Form 1099Q 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 (taxfree earnings) 
 2.  $950 (earnings) − $932 (taxfree 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.
taxmap/pubs/p970035.htm#en_us_publink1000178546An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a taxfree 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 taxfree educational assistance, he or she must further reduce them by the expenses taken into account in determining the
credit.
taxmap/pubs/p970035.htm#en_us_publink1000178547Assume 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: Taxfree educational assistance  −3,100  
 Minus: Expenses taken into account
in figuring American opportunity credit
 −4,000  
 Equals: Adjusted qualified
education expenses (AQEE)
 $1,200  
   
The taxable part of the distribution is figured as follows.
 1.  $950 (earnings)  × 
$1,200 AQEE
$5,300 distribution
   
  = $215 (taxfree earnings)  
 2.  $950 (earnings) − $215 (taxfree 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.
taxmap/pubs/p970035.htm#en_us_publink1000178552If 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.
taxmap/pubs/p970035.htm#en_us_publink1000178553Assume 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
 =  $158 AQHEE (ESA)
 
 $1,200 AQHEE  × 
$4,600 QTP distribution
$5,300 total distribution
 =  $1,042 AQHEE (QTP)
 
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.
taxmap/pubs/p970035.htm#en_us_publink100025471A tuition and fees deduction can be claimed in the same year the beneficiary takes a taxfree distribution from a QTP, as long as the same expenses aren't used for both
benefits.
taxmap/pubs/p970035.htm#en_us_publink1000178559If 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%ofadjustedgrossincome limit.
 The aggregation rules discussed below have been eliminated for distributions after 2014. For more information, see
What's New for 2015 at the beginning of this publication. 
If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc.) from all such accounts in order to determine your taxable earnings for the year. By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP
accounts.
taxmap/pubs/p970035.htm#en_us_publink1000178560In 2015, Taylor received a final distribution of $1,000 from QTP #1. His unrecovered basis in that account before the distribution was $3,000. If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form
1040).
taxmap/pubs/p970035.htm#en_us_publink100042752Assume the same facts as in
Example 1, except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2015 of $10,000. His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Taylor's adjusted qualified education expenses for 2015 totaled $6,000. In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as
follows.
 1.  $10,000 (total distribution) − $4,500 (basis portion of
distribution) 
  = $5,500 (earnings included in distribution) 
 2.  $5,500 (earnings)  x 
$6,000 AQEE
$10,000 distribution
   
  = $3,300 (taxfree earnings)  
 3.  $5,500 (earnings) − $3,300 (taxfree earnings) 
  = $2,200 (taxable earnings) 
       
Taylor must include $2,200 in income on Form 1040, line 21. Because Taylor's accounts must be combined, he can't deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings.
taxmap/pubs/p970035.htm#en_us_publink1000178566Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in
income.
taxmap/pubs/p970035.htm#en_us_publink1000178567The 10% additional tax doesn't apply to the following distributions.
 Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.
 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 longcontinued and indefinite duration.
 Included in income because the designated beneficiary received:
 A taxfree scholarship or fellowship grant (see
TaxFree Scholarships and Fellowship Grants in
chapter 1);
 Veterans' educational assistance (see
Veterans' Benefits in
chapter 1);
 Employerprovided educational assistance (see
chapter 11); or
 Any other nontaxable (taxfree) payments (other than gifts or inheritances) received as educational
assistance.
 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.
 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.
taxmap/pubs/p970035.htm#en_us_publink1000178572
Use Part II of Form 5329 to figure any additional tax. Report the amount on Form
1040, line 59, or Form 1040NR, line 57.