<p>I know that off-campus housing expenses (rent, food, utilties) as they are quoted by the school are qualified 529 expenses. However, if a surplus is paid out to the student from their grants and scholarships does that have to be subtracted from the total qualified amount? (lets take books and other qualified expenses it might be used for out of the argument to make this simple)</p>
<p>Example:</p>
<p>Lets say the college term is 4 months. The school states $1000/month for off-campus housing expenses. The student receives $400 in grant/schollie surplus (basically $100/month), does that reduce the qualified per month housing allowance you can use from a 529 to $900/month? (again, lets not worry about other expenses that the surplus might be used for to keep the question simple).</p>
<p>Yes, qualified expenses for a 529 distribution have to be reduced by tax-free scholarships and grants. Not just the surplus but also by the amount applied to the student’s account for qualified expenses. See examples 1 and 2 in chapter 8 of that link in particular.</p>
<p>There are things you can do by making parts of the scholarships/grants taxable to the student or even the earnings on the 529 taxable to the student in order for the parents to take the AOC. It depends on the various amounts involved.</p>
<p>So, the qualified expense for housing is what the school states to be applicable? (would the school state this amount on the FA letter?) Not what the student actually paid for housing? </p>
<p>The off-campus amount is not likely to be stated on an award letter. On-campus should be on the school’s website or on the bill. The off-campus amount may not be published on the website, you may have to contact the school.</p>
<p>Maybe I’m confused, but the rules seem to indicate no matter how much is received in grant and scholarships, the student can fully pay the allowable amount of room/board using 529 funds without tax/penalty applied to those funds.</p>
<p>If I read things right you are allowed to use 529 funds tax/penalty free to pay for the total of all qualified expense after you have subtracted the tax free portion of scholarships/grants received. Since Room/board is not a tax free part of scholarship/grant money, it would seem that no matter how much scholarship/grant money you receive you can still pay for all qualified room/board expenses using 529 money without paying tax/penalty on it. If I’m right the below example holds true:</p>
<p>Scholarships and grants = $20,000
Tuition/Fees (and whatever else qualifies tax free) = $15,000
Student gets $5,000 disbursement once tuition/fees are paid which is taxable income and is reported on their taxes as such. They can use that money for whatever they want (like paying the taxes on it so the parents don’t have to <g>)
Allowable off campus room and board is $10,000. The student can receive the full $10,000 from the 529 without paying any additional taxes since the $5000 they got in cash is taxable and does not have to be considered in the allowable tax-free 529 withdrawal equation.</g></p>
<p>From additional research I’ve done on the Internet (FWIW) it seems to me that my last statement was correct. One thing I am still not sure about, If the school applies grants/aid directly against on-campus room/board bill can you still withdraw 529 funds tax/penalty free against it?</p>
<p>Example:</p>
<p>Scholarships and grants = $20,000
Tuition/Fees (and whatever else qualifies tax free) = $15,000
School applies remaining $5000 (which is taxable) in grants directly against on-campus room/board charges of $10,000
Student is given $10,000 from the 529, then pays the remaining $5000 on campus housing bill and keeps the rest for whatever, using the total $10,000 of room/board expenses as justification to keep it tax/penalty free (even though $5000 of it was paid directly by grants)</p>
<p>The 2nd scenario is my son’s, different numbers. I’ve never done it. I don’t see that you can say the full 529 distribution went to qualified expenses if scholarship money was applied to the bill for room and board, regardless that my son reports taxable scholarship income. I’ve only taken enough from the 529 to pay the R&B shortfall. Keeping 529 distributions for whatever isn’t a qualified expense.</p>
<p>As to your first scenario, I don’t know. It’s slightly different in that the scholarship money could be thought of as going to whatever and the 529 toward the R&B as long as the scholarship whatever amount is being reported. I have read posts on CC about inquiries people have received from the IRS about 1099Qs and the expenses the distributions were used for, so personally I wouldn’t do what you propose, I’d still only withdraw the shortfall.</p>
<p>There isn’t enough in son’s 529 to worry about not using it all before he graduates so I don’t worry about it too much.</p>
<p>You can withdraw 529 funds penalty free up to the amount of qualified expenses, even if they are covered by scholarships (so in your example you could take out $30,000 without penalty).</p>
<p>However, a portion of the distribution could be taxable, based on the percentage actually used for qualifying expenses, and amount of earnings vs contributions (as explained in the examples in pub 970).</p>
<p>In your example, the $5000 of taxable scholarships are applied to room and board, leaving $5000 to apply the distribution. $5000 of the distribution could be taxable to the extent that it is made up of earnings.</p>
<p>CTScoutmom’s answer didn’t quite make sense to my understanding, so I called the IRS. They stated that the “taxable” parts of grants and scholarships don’t come into the equation. This makes sense to me since they are really treated and taxed like regular earnings by the IRS. </p>
<p>She walked through her own scenario questions with me and they boiled down to did the amount of 529 qualified expenses (inc. room/board) less “tax-free” grants/scholarships exceed the amount of the 529 distribution? If the answer was “no” then the distribution is not taxable.</p>
<p>I think our immediate reaction is that my scenario’s doesn’t feel right which results in my (and others) uncertainty, but it appears they are legally correct. Even if the school applies part of the grant/scholarships directly to room/board it still does not come into the 529 distribution equation since the IRS taxes it like money out of your pocket. So to replace it into your pocket with 529 funds is technically (from an IRS perspective) a reimbursement for qualified expenses you paid.</p>
<p>I believe this is one of those strange, but true things. I’m going to try and find a professional who can confirm this for me, but right now I’m believing both of my scenario’s are correct.</p>
<p>Made an error in last post that CC won’t let me edit. Second paragraph should read:</p>
<p>“She walked through her own scenario questions with me and they boiled down to did the amount of 529 qualified expenses (inc. room/board) less “tax-free” grants/scholarships exceed the amount of the 529 distribution? If the answer was “YES” then the distribution is not taxable.”</p>
<p>I did some more checking around with a tax professional and with a test run in Turbo Tax.</p>
<p>The taxable parts of scholarships/grants are treated as ordinary income by the IRS. In other words, they view it no different than income from a job the student might have had on the side. This being the case, the 529 distribution could be considered a reimbursement to the student for their own money they used to pay for the room/board, so none of it is taxable as it can be considered to have been used to pay for room/board.</p>
<p>If my daughter is on a partial food plan, can I withdraw an amount from the 529 plan up to the cost of a full meal plan as stated in the COA? My total cost (partial meal plan + cost of food prepared in the dorm) will likely exceed the cost of a full meal plan. Due to food allergies, none of these costs will be for dining out or for take out.</p>
<p>I believe you could as long as you kept a record of the non-meal plan expenses. It shouldn’t be any different than living off-campus and buying a partial meal plan to cover your lunches and also buying food for off-campus place. As long as you could document the total expense and it didn’t exceed the COA’s food estimate.</p>