529 use for Grad School

[superdomestique]

@Twoin18

“Expenses for room and board must be incurred by students who are enrolled at least half-time (defined later).
The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.

a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the school.”

I can see the argument that the expenses must actually be “incurred” but you are allowed to withdraw (a different amount of) room and board expenses when living at home (eg during the pandemic when classes were remote) without having to actually pay rent to your parents.

So I don’t see any real reason to force your kid to keep a pile of receipts, let alone send them to you. It’s vanishingly unlikely that any concern will ever arise if you withdraw the listed COA amount. In any case their bank/credit card statements would surely suffice if there was ever an issue, how much cash do kids spend nowadays?

This is exactly what I was looking for. Thanks!

[DigitalDad]

Yes, for a student NOT living in Univ housing, the reimbursement of the INCURRED expenses must not exceed the published allowance used for financial aid purposes.

Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service

I haven’t found any IRS ruling that changed that concept because of Covid remote learning (but I can be educated to the contrary). Incurred expenses of living at home do qualify. Of course, if you charge them rent, you’ll have to recognize rental income on your return.

The only leniency that I know of, was the extended deadlines for returning tuition refunds.

Naturally, you will not “need” to document that they ACTUALLY incurred any expenses, UNLESS/until there is an audit. I personally prefer the peace of mind that I do have all documentation needed for that possibility, however unlikely. (I’ve dealt with too many audits in our business by all kind of tax authorities at all levels, incl from other states)

Credit card statements will only show that you paid at a restaurant, or at a Walmart, but it doesn’t show how many meals for how many people, or which items purchased were actually “board”, not clothing, electronics etc.

For an adult (no matter how young), it’s not a big imposition to get used to keeping receipts - soon, in their professional lives, they’ll have to do that all the time. Might as well make THAT part of their financial education and have them get in the habit of “backing up with records”.

PS: I made a point to involve my daughter in investment choices, discussed investment timing, market cycles, when to use what fund classes, etc. I may not be around forever - so this is the perfect opportunity to treat this as a “hands-on” lab.

[MIP750]

I have a similar question because my senior undergrad son will likely attend grad school after a gap year. He received a scholarship for undergrad and so can withdraw that amount for the calendar year from the 529 and pay taxes on the gains but no penalty. But we’d rather leave the money in the 529 for now. If he receives a stipend or fellowship for grad school (bc like the earlier poster his program would be fully funded), then is the same “rule” applicable re withdrawal without penalty and with only gains taxes? If not, then I think we may go ahead withdraw the amount of the scholarship money this year (for undergrad) and invest elsewhere. Do not want to transfer to another beneficiary.

[Twoin18]

@MIP750

If he receives a stipend or fellowship for grad school (bc like the earlier poster his program would be fully funded), then is the same “rule” applicable re withdrawal without penalty and with only gains taxes? If not, then I think we may go ahead withdraw the amount of the scholarship money this year (for undergrad) and invest elsewhere

Yes, and I would suggest you definitely don’t withdraw until you are sure there won’t be any kiddie tax implications (much easier in grad school than as an undergrad) in order to use his (presumably lower) tax rate.

[MIP750]

Ah! Okay. So yes we can withdraw it for grad school scholarship. But caution bc kiddie tax if doing it now. Thank you!

I need to research kiddie tax bc I don’t even know what that involves. The taxable amount each year for the undergrad gains would be less than the standard deduction. Or we’d make it so with the withdrawal amount. I wish I had an accountant in the family!

[blossom]

Some accountants are surprisingly dense when it comes to ANY financial issues re: universities, 529, etc. I know people in real life who have gotten absolutely terrible advice from their CPA or financial planner (as in- THE WRONG ANSWER, easily verified by googling the appropriate IRS form). So don’t assume you’d be better off with a professional!