<p>I have a small 529 plan with my son as the beneficiary. He will be starting his 3rd year soon. I have not taken any distributions yet as I have had serious doubts as to whether his father would be able to kick in any funds, so I wanted to save as much as I could fo later, in case I needed it. So now that we have made it through 2 years, I want to start tapping those funds. But here is my question. I have read where it is best to have the checks made out to the student. But I take a college tuition credit on my tax return (I believe it's the American Education credit or something like that...it only amounts to $2500 I think). So don't I have to have the money put in my name...since I am the one showing education expenses? He has less than $5000 yearly income from a part-time job. </p>
<p>Also, how does this distribution affect the tax credit that I take each year? Do I no longer get that? I hadn't even though of this until I started looking into it, so thought I should ask here before I send in the distribution request. </p>
<p>Money taken from a 529 can’t be used for the tax credit. It is already tax-advantaged money, and the IRS is kind of like a department store that doesn’t let you stack coupons. </p>
<p>For tax purposes, I would say, use your 529 money for room and board, which are not allowable expenses for AOE. Use your own money to pay for allowable expenses like tuition, fees, and books. We send our 529 funds directly to the institution. The IRS paperwork has d’s name on it. It seems to make no difference at tax time.</p>
<p>You can still get the tax credit if you (and your son) qualify, but the amount of education expenses used to calculate the credit you take can’t be taken into account again to support a tax-free distribution from the 529 plan. You certainly want to make enough payments yourself to take the 100% credit, if any of that is still available to you. If you are only going to get a partial credit, however, you will be better off using the 529 plan.</p>
<p>I am not entirely sure of myself on 529 plan rules – someone should correct me if I am wrong – but I think: (a) technically, it does not matter whether the distribution gets made to you or to your son, as long as the distributee makes qualifying educational payments, but (b) the paperwork and reporting will be much, much easier if it gets made to your son and he pays the tuition/fees, or the amounts are paid directly from the plan to the college on his behalf.</p>
<p>Note that any taxable distributions, even if they go to your son, will be taxed at your rate, not his, if it is higher.</p>
<p>I also prefer to have the 529 checks sent directly to the college. As I recall, when I got the 529 distribution (which was always much less than the total expenses since we used other money to pay much of our kids expenses) there was an additional IRS paperwork hassle, though I don’t remember exactly what it was.</p>
<p>“the paperwork and reporting will be much, much easier if it gets made to your son and he pays the tuition/fees, or the amounts are paid directly from the plan to the college on his behalf.”</p>
<p>Yes Yes Yes, with a slight modification. I wouldn’t even have it go through your son. Just contact the 529 plan and have them send the check directly to the school, made payable to the school. There will be zero paperwork, and zero headaches.</p>
<p>Thanks. I don’t want to have the funds sent directly as they have such a short window of time for the money to be due, and I wouldn’t want to risk it being late.</p>
<p>Also, I don’t want to impact any FAFSA loan stuff by giving the school information about the 529 plan. Everything I have read states that sending it directly to the school is the least preferable option.</p>
<p>Not sure what you mean by “100% credit”? I should probably go back and check last year’s return. I don’t remember the details of how the credit works…just that I could only take half of what they offer because of my income level. Does the 529 distribution get subtracted from the credit (or the other way around)?</p>
<p>I have a specific reason that I do not want the money sent to my son. His father and I are no longer married, and unfortunately have no communication between us, at all. </p>
<p>(It’s a long story - I don’t even know the answer other than right after he got remarried, he became very nasty and refused all calls, would not respond to emails, and in fact threatened to not pay anything toward our son’s education if I ever contacted him again. He told our son to tell me this…that is how miserable he is. He had stopped paying child support when our son was 16, and that was the only reason that I had contacted him. This was over 2 years ago, I have not spoken to him since. Sucks…I know. We had a good relationship before he got married.) </p>
<p>Anyway, I don’t want to have the check made out to my son, as he would not differentiate between what I owe, and what his father owes. I don’t want to end up using my hard-saved money to pay his father’s half of his expenses. And if he got the funds directly, that is exactly what would happen. :-(</p>
<p>Although…hmm. I think I just figured out what I need to do. I will have the check made out to my son, but put it in our joint account. That way I can manage the expenditures.</p>
<p>If you filled out your FAFSA correctly, the 529 was already included as an asset in calculating your EFC. There’s not going to be any reduction in aid by sending money directly to the school. Not sure what you’ve been reading, but sending directly to the school is not in any way undesirable.</p>
<p>Perhaps it does not affect the FAFSA…I may have mistated that. But I defintitely have read that it is the least preferable option, due to financial aid issues. I will have to go back and find where I read that.</p>
<p>529 funds are included as assets in the FAFSA which is why you typically use your 529 funds up first so that future FAFSA years do not have that money included.</p>
<p>I have always had the check sent to me (parent), then paid the school. But I can’t see how sending it directly to the school would be an issue at all. I assume they send to the school as promptly as they would to me, so I wouldn’t worry about it being late. And agree with those saying if you are honestly filling out the FAFSA, CSS, and any other questionnaires from the colleges on your finances, this 529 is already listed anyway. And sending a payment from it (a check) certainly doesn’t tell the college how much is in it anyway. </p>
<p>The account is still in your name and the distribution will still trigger a tax document to you from the 529 account company, regardless of where the distribution goes.</p>
<p>529 funds canbe a FAFSA issue if the account owner is someone other than the student or parents. Then it would be considered untaxed income to the student. Since it is your account, it is already your money, so a check sent to the school is not an issue.</p>
<p>For the tax credit, there are a few issues. The full credit is 2500 based on 4000 paid for tuition. 40% is “refundable” meaning you can get it if you don’t owe any income tax. The remaining 60% can only be used to offset income taxes. If you are low income, that would keep you fromclaiming the full credit.</p>
<p>The 529 money canbe used to pay room and board as well as tuition and other qualifying expenses, so do that first, and try to leave 2000 -4000 of tuition to be paid with “cash” or loans. The first 2000 produces 100% credit, and the second 2000 is only 25% - or 10% if you only claim the refundable portion.</p>
<p>If his grants and scholarships can be used for r&b, do that too, to leave more tuition to be paid with 529 money. If he has loans used to pay tuition, those also qualify toward the credit. If you want to post how hisfinancial aid breaks down (or pm it to me). I can show you how to get the best tax advantage.</p>
<p>Finally, if the 529 balances less than his COA, it can be distributed to the extent of both you out of pocket and the value of his scholarships his final year, without tax penalty. Tax would be due depending on your tax bracket on only a portion of the earnings. If you are concerned about having money available the final year that might be the best option.</p>
<p>That minor correction may need a minor correction: Due to the so-called “kiddie tax” rules, the beneficiary may have to pay tax on that amount at the parent’s tax rate, if the parent’s tax rate is higher than his.</p>
<p>Re:timing of payments to school. In most cases, the 529 plan provider can automatically send a check to your address of record made out to the custodian or the student with a simple phone call. Sending a check to a different address, a third party (such as the school) or direct deposit to a bank account requires additional paperwork that can cause a delay. It’s a good idea to check with the 529 provider ahead of time if you want to set up payment option as.</p>
<p>After reading this I realize that I probably screwed up. Just sent 529 distribution directly from administrator to school for full bill. Have been busy and didn’t even think about tax consequences.</p>
<p>GUI, most administrators let you request distribution from their website.</p>
<p>To save me from researching, are there quick answers:</p>
<p>Are 529 distributions taxable as income? I was assuming it is tax free since it was after tax money going in.</p>
<p>Is there an income cutoff to qualify for the $2,500 tax credit?</p>
<p>If tuition is paid from 529, are we disqualified from tax credit? How does the IRS even know what total tuition is? Considering that COA is X which is reduced by institutional merit or grants (no federal aid or loans) how do they know the net tuition due?</p>
<p>Well, I just figured out that I messed up our chance for the tax credit because I didn’t hold back 4,000 from the 529 payment . I think we might have qualified, we’ve never qualified for any tax credits before so I didn’t even consider it. Oh well, at least the reported college COA (reported to financial aid organization) is more than 4k higher than what came out of the 529. Is there any way that the IRS would know that we didn’t pay the difference out of pocket?</p>
<p>Don’t you have a second chance by paying $4000 toward tuition for 2nd semester? If you pay in December, wouldn’t that count toward the 2013 tax credit?</p>