<p>This is the first year that we have taken a distribution - son is a junior and I wanted to save $$ in case his dad didn't come though with any contributions. He has paid half so far, so I didn't take anything out before this year ( I took out $4k in the fall to pay for expenses so far (the distribtuion was in his name and he signed check over to me - I manage the money and give him what he needs to pay expenses during the year).</p>
<p>I paid last spring's tuition, in the spring, but I think the taxes I do generally have me counting that as last year's (2012) expenses, so those don't count for this year. The school's "estimate of costs" for this fall semester were $4656, plus summer tuition was $1150. So that would $5806 for "room and board" expenses this year - so that is the "max" that we can show for those expenses, right? He also had book expenses of $540, so total "qualified" expenses would be $6346 - does that sound right? </p>
<p>I was thinking about taking the rest of that as a second distribution. I don't want to wind up with too much money in the pot. He has an internship starting in Jan, so there will be no spring tuition to pay (and I had counted on paying that this Dec - that would have given me the $2500 credit - but that's not possible now.) </p>
<p>You aren’t allowed to claim the AOC (tax credit) for bills paid with tax advantaged money (like funds from a 529). Op, you asked how we do it? We pay all non-qualified expenses (room and board) with the 529 money so that we can still claim a potion of the the AOC at tax time. </p>
<p>I’d try to pay at least $2000 for qualified expenses out of other funds so I could get the bulk of the AOC and then dip into the 529 for the rest.</p>
<p>You mentioned summer tuition but only fall r&b. Is your son’s tuition and fees covered by scholarships and/or grants? Yes, the books are qualified expenses both for the AOC or the 529 distributions but you can’t use the same expenses for both. The school’s estimate of expenses only comes into play with off-campus housing, is that the situation? Why did you apply payments made in spring 2013 to 2012 taxes?</p>
<p>If the checks are made out to your son then he will get the 1099Q in January. If there is an excess distribution he would have to report it on his return.</p>
<p>We always pay the bills up front and then get reimbursed from the tax advantaged funds leaving enough QEE to take the AOC. You need the cash flow flexibility in order to do that.</p>
<p>Spring expenses won’t count because he will be in an internship for that entire semester - there will be no tuition at all.</p>
<p>No, we have no scholarships or grants. The amounts I gave are after the student loan amounts were applied. Only what was due and paid.
The summer tuition was for an online course, and he was home during that time - no room and board costs for the summer.</p>
<p>He is in off-campus housing now, so those costs are in the amounts I mentioned. His internship will be elsewhere however, so the apt. will be sutlet, and there will be no qualifying expenses the spring semester. </p>
<p>I applied the spring 2013 payments to 2012 taxes, well, because I could. It was billed in 2012, and IRS regs allow that. I did it that way the first year -, and the 2nd year as well… it makes sense to me to account for everything in the one year. </p>
<p>I DO have the cash flow to pay up front - that is what I have done all along. (The 4K distribution was just last month.) But I didn’t really understand the whole AOC thing…I just did my taxes and what I got back was just a refund…I really didn’t look into it any further than that. Clearly I should have not taken the $4k distribution, but I didn’t know he would be getting the internship. No way to see into the future. </p>
<p>“If the checks are made out to your son then he will get the 1099Q in January. If there is an excess distribution he would have to report it on his return.” Yes, I understand that. That is why I made this post. As far as I can tell, the way the IRS determines if there is an “excess distribution” is if the distribution exceeds the schools estimated total costs. Is that not correct??</p>
<p>“We pay all non-qualified expenses (room and board)” - I don’t understand what you mean…those expenses ARE qualifying expenses. ???</p>
<p>Room and board are non-qualified for the AOC so a good thing to put 529 funds toward is what the poster was saying.</p>
<p>You can use expenses paid for with loans for the AOC or 529 distributions. Loans are not free money.</p>
<p>I’d like to see an IRS reference that says expenses paid in one year can be used on taxes the previous year. The only issue that comes up and where the law isn’t clear is when scholarships/grants are applied in December but expenses aren’t billed/paid until January. That makes it look like the student has more income in the first year when looking at the 1098T than they really do. Otherwise I think it’s clear the expenses have to be paid in the year they are used for taxes.</p>
<p>No, the distribution can’t exceed actual expenses qualified for 529 distributions. In the case of a student living off-campus, the school’s allowance as used for COA for off-campus r&b can be used.</p>
<p>I realized this might be confusing, in my initial post:
“So that would be $5806 for “room and board” expenses this year” </p>
<p>What I meant was this:<br>
"So that would be $5806 for “tuition plus room and board” expenses this year. </p>
<p>So the TOTAL maximum qualifying expenses that he could have for 2013, will be $6346. He won’t have any more books or supplies expenses. So isn’t that right - $6346 is the max?</p>
<p>The term “qualifying expenses” has different meanings depending on the context. Room and board are qualifying expenses for 529 distributions, but not for claiming the AOC.</p>
<p>I think you may shortchange yourself by putting the education expenses into four tax years (when you group education expenses by school year) instead of five tax years (when expenses are grouped by calendar years). Yes, the AOC can only be used four times, but there are other education tax breaks that can also come into play that can’t be used with the AOC. Although, if you haven’t used the AOC for both of your son’s first two years, this may be a moot point for you.</p>
<p>Yeah, that part didn’t sound right. If an education expense is incurred and paid in the same tax year, I don’t see how it can be shifted to the previous tax year.</p>
<p>Oh good grief. I just looked it up and you are right - I had it backwards!!! </p>
<p>I DID pay his spring semester in the spring, and so that money will count for 2013. Oy vey. Okay, I’ll have to run these numbers again…I might be able to get that credit after all…but that’s not really my main concern. I just wanted to see how the rest of you “managed” this…to not get taxed on any distributions. It shouldn’t be this hard! :-(</p>
<p>Annoyingdad: “You can use expenses paid for with loans for the AOC or 529 distributions. Loans are not free money.”</p>
<p>I totally do not understand what you are saying here. The AOC is the credit on your tax return, isn’t it? What does that have to do with his student loans? </p>
<p>And as far as the loans, I sure never implied that I thought loans were “free money”. Not sure what you meant by that?</p>
<p>Oh wait a minute…you mean when I use the schools Estimate of Cost…I should add back the loan amount to that? (Their total estimate is actually a number that is reduced by the loan award.) In other words…both the estimate of total costs, and my costs paid, should include the student loans? I totally did not know that.</p>
<p>Yeah, I just keep track of what expenses are paid and when, subtract out enough expenses for the AOC and get re-imbursed the rest or less. It’s a lot easier not to overwithdraw when you don’t have to rely on the distributions to make payment in the first place.</p>
<p>To keep things straight, the 529 distribution should be made in the same year that the expense was incurred and paid. If you do this, and as long as 529 distributions do not exceed 529 qualifying education expenses for the year, you are good to go and there will be no taxable distributions.</p>
<p>Now, claiming the AOC credit will throw a bit of a wrench into things, because you cannot claim the AOC for qualifying expenses (different than 529 qualifying expenses) that you paid with 529 money. So, pay all of the expenses that are 529 qualifying expenses but not AOC qualifying expenses (room and board) with 529 money, and then use remaining 529 money to pay tuition, except for the last $4000 in tuition expenses, which should be paid with non-529 money in order to get the full AOC.</p>
<p>"I think you may shortchange yourself by putting the education expenses into four tax years (when you group education expenses by school year) instead of five tax years (when expenses are grouped by calendar years). Yes, the AOC can only be used four times, but there are other education tax breaks that can also come into play that can’t be used with the AOC. Although, if you haven’t used the AOC for both of your son’s first two years, this may be a moot point for you. "</p>
<p>Well I am pretty sure that I DID get the credit the first two years. It would be kind of hard to avoid since this is the first year that I have taken a 529 distribution.</p>
<p>Yes, that’s what I meant but other than for off-campus r&b, estimates of costs have nothing to do with it, use the actual amounts of qualified expenses from bills and what you paid, including the amounts paid for with loans.</p>
<p>It’s not just to keep things straight, 529 distributions must be taken in the same tax year the qualifying expenses are paid.</p>
<p>Well the actual costs are MORE than the schools estimate (apartment is more, his food has been more), and I thought that I read that the estimate is the maximum that you can use for costs.</p>
<p>Adding the loans back in should make a huge difference. The loans are automatically applied by the school, before I get the tuition bill (it shows the loan being applied), so it really is not something that I (literally) pay to the school…it’s a reduction in the tuition bill. I bet I used the lower (reduced) amount on my previous taxes too.</p>
<p>Qualified expenses with respect to AOC (tuition and books) which are paid for with student loans may be claimed by the parent for the AOC tax credit.</p>
<p>As I understand it, you are only taxed on a 529 distribution if it is not applied to a qualifying expense and, in that event, it is only the interest accrued in the 529 account that is used for non qualified expenses that is penalized. The basis of your 529 is not “tax-advantaged”; it is the interest generated which grows tax-free.</p>
<p>Right; the part of a distribution that was used for a non-qualified expense will be divided on a pro-rata basis between contributions and earnings, and only the earnings portion will be subject to tax, and also possibly the 10% penalty. All the contributions have already been taxed.</p>
<p>If a sum was taken from the 529 that didn’t leave enough expenses for the parent to take the full AOC, the student could report the earnings portion of that difference as taxable income and only pay the tax due and not the 10% penalty if the parent uses that amount to take the AOC.</p>
<p>OP, if you haven’t looked at it already, IRS Pub 970 has all the info about taxes and education:</p>
<p>"As I understand it, you are only taxed on a 529 distribution if it is not applied to a qualifying expense and, in that event, it is only the interest accrued in the 529 account that is used for non qualified expenses that is penalized. " </p>
<p>Well that makes sense, but I haven’t really see this written out clearly anywhere.</p>
<p>“Qualified expenses with respect to AOC (tuition and books) which are paid for with student loans may be claimed by the parent for the AOC tax credit.”</p>
<p>You know, I don’t think of this whole thing in 2 parts. It’s not AOC and 529…in my mind. I saved some money to pay for college, and I want to spread it out over his last two years…to pay myself back. It sounds simple enough, but with all the IRS rules, and the fact that the check was made out to HIM (which I only did because that was the general recomendation) now so now HIS taxes get more complicated (grrrr)…and then throw the credit thing in there…it’s a real PITA. I send him money for his expenses…period. I don’t stop and think about what kind of expense it is…whether it goes with the AOC or not…I have NEVER even made that a consideration. Yeesh.</p>
<p>Well I have looked at it a bit, but really I do my taxes with TurboTax and it does everything for me, so I really have not had to do any thinking about it yet…because I had no distributions yet. I should have started reading it months ago apparently.</p>
</p>