The portion of a QTP distribution that is allocable to a recovery of contributions to the plan (basis) is not taxable. This is true whether the plan is a state QTP or a private educational institution QTP. A beneficiary who receives a distribution of earnings from a state or private QTP to pay college costs does not have to include the earnings in income if the total distribution does not exceed “adjusted qualified higher education expenses” for the year, as discussed below.
On Form 1099-Q, which you should receive from the plan paying the distribution, the gross distribution in Box 1 is divided between earnings in Box 2 and the return of investment (or basis) in Box 3.
For purposes of figuring if part of a distribution from a QTP is taxable (see below), qualified higher education costs are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, which is any college, university, vocational school, or other postsecondary school eligible to participate in federal student aid programs.
Reasonable room and board costs for a designated beneficiary who is at least a half-time student also qualify. The limit that is considered reasonable for room and board expenses is the greater of the room and board allowance determined by the eligible institution for federal financial aid purposes or the actual amount charged ...