MESP (MI 529) excess distribution - basis taxable to MI

Forum|Forum|11 months ago
April 14, 2025
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I had an excess distribution from my son's Michigan Education Savings Program account.

The instructions for Line 8 of MI's Schedule 1 say in part: "Add, to the extent not included in AGI, the amount of money withdrawn in the tax year from ... [an MESP account] ... if the withdrawal was not a qualified withdrawal ... You may first exclude any amount that represents a return of contributions for which no deduction was claimed in any prior tax year."

If I understand correctly, Michigan taxes neither contributions nor earnings in its 529 plan. I would expect, then, any excess distribution attributable to the basis on my 1099-Q needs to be added back in the year in which it was taken, and that's what the above instructions are telling me to do. (The excess distribution is in AGI, which is the starting point for the MI return, so that's already handled.)

I've completed the interview in TurboTax and am confident that the numbers TurboTax enters on my federal return are correct. However, when I inspect my state return using "Forms" view, there is no entry on Line 8 of the Schedule 1. Shouldn't there be? Is this a TurboTax error, or is my understanding above incorrect/no entry on Line 8 of Schedule 1 is appropriate?

TurboTax Home & Biz Windows

AmyC

Line 8 is from the smart worksheet above it. If you had withdrawals for which you received a prior year deduction, it should be added back.

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hilliteAuthor

That's consistent with the instructions I quoted. But based on my interview responses (in which I entered qualified expenses from the 1098-T and distributions from my 1099-Q) TurboTax says I have nothing to add back. Am I missing something?

KrisD15

Michigan DOES tax the earnings of a non-qualified distribution.

Michigan instructs you to ADD BACK TO INCOME the earnings portion of that non-qualified distribution if it is not included in your Federal AGI.

The non-qualified distribution (Form 1099-Q) WAS taxed and the earnings portion is included in your Federal AGI, so no additional add-back is needed for the earnings on that distribution, however, if you took a Michigan State tax break for making a contribution, an adjustment for a return of that contribution may be needed for your Michigan State return since the Federal return would not adjust for that.

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