I won’t argue this further…but isn’t an enrollment deposit required of ED students to secure their enrollment.
The parent said this is a small amount of money and they can certainly spend that this year. So…I don’t think there is an issue for this OP anymore.
Well I hope other people don’t read the advice in the first half dozen posts on this thread and conclude that they can or should withdraw 529 money to pay for a deposit in the year before their kid starts college. Because that is clearly not allowed as a QHEE.
I’ve spent a lot of time pondering on how to best extract money from a very overfunded 529 over the last five years, and it’s clear that there’s massive confusion about the rules. Just Google when can I withdraw from my 529 and some sources say “paid” and others say “incurred”.
The IRS actually says “When figuring an ed- ucation credit or tuition and fees deduction, use only the amounts you paid and are deemed to have paid during the tax year for qualified education expenses.”
It appears that and is being used in a disjunctive rather than conjunctive sense. That would mean that a deposit held by a college would be “deemed” paid when the bill is issued.
An interesting question follows for colleges (eg in the UK) where you can prepay for multiple years to lock in the first year tuition rates. It would appear that a prepaid tuition plan where the college holds the money is OK, but you can’t withdraw money tax free from a 529 to fund that (because the QHEE definition requires the withdrawals to only cover the current year and first few months of the next year). Even a one time full academic year payment might be problematic for a quarter based system, with the third term starting in April.
I think we all agree. This OP cannot use the money paid in 2022 and then withdraw money from the 529 in 2023. That’s not allowed, I don’t believe.
@BelknapPoint do I have that right?
No we clearly don’t agree. If you think you can’t withdraw the money in 2023 and the IRS clearly says you can’t withdraw without a tax penalty in 2022, then you are implying that it’s not possible to fund an early deposit as QHEE from a 529, even if the money is subsequently credited to tuition.
I definitely agree with you that there’s some murkiness in IRS guidance about timing of distributions and how those relate to expenses. Part of this is because the IRS hasn’t really issued clear rules on this. Makes it tough in your case when trying to optimize.
I think what folks were suggesting to OP is that it’s no big deal that an expense was last year and a 529 distribution was this year, because the distribution is fungible and can just be applied to expenses for later this year. Of course, that does leave the deposit as sort of an orphan expense which may never be “recaptured” to apply a 529 distribution.
Btw, I think you were looking at the definition of QHEE for tax credits, not 529s, with what you quoted. I don’t think the stipulation about expenses paid at end of year for first Q of next year applies to QHEE definition in the case of 529s. (Although some would argue there isn’t a clear rule about timing of expenses and distributions wrt QTPs at all, and therefore anything goes; that’s a different can of worms though).
Okay, I had missed this initial post of yours. Sorry. I understand what you’re suggesting and it’s an interesting question. Personally I wouldn’t spend much time considering the ins and outs over $300 but it’s interesting to think about this.
Good point. So the definition of “deemed paid” and whether there’s a disjunctive “and” in Pub 970 becomes more relevant.
The whole timing issue is a mess, we’ve had lengthy debates before about when you can withdraw to match a scholarship without paying the 10% penalty (which is my current bugbear). The recent changes to allow a tax free transfer from a 529 to a Roth IRA are going to encourage more overfunding of 529s, making this an even bigger issue in the future.
That’s part of the IRS definition of Qualified Education Expenses for Education Credits, found here: Qualified Ed Expenses | Internal Revenue Service (irs.gov)
Part of this definition, specifically the part about “an academic period* that starts during the tax year or the first three months of the next tax year” does not apply to 529 plans.
529 plans can be used to prepay a student’s qualified education expenses. It says so in the 2021 version of IRS Pub 970 on page 51, in the first sentence under the section “What is a QTP?”
A deposit is clearly an expense related to a student’s enrollment or attendance at an eligible postsecondary school, and it will be credited at a later time to QEE. Again, for 529 purposes, it doesn’t matter how early it is paid. The only timing factor is that the 529 distribution must be taken in the same year that the expense is paid.
While the IRS has (frustratingly) not made explicitly clear that the above timing is important, there is an example on page 53 of Pub 970 that can provide guidance:
Taxable earnings. Use the following steps to figure the taxable part.
1. Multiply the total distributed earnings shown in box 2 of Form 1099-Q, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.
2. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Schedule 1 (Form 1040), line 8z.
Could you comment on the meaning of “paid and are deemed to have paid” (p2 of Pub 970)? Do you consider that it doesn’t apply to QTPs given the qualifier “When figuring an education credit or tuition and fees deduction…”?
Presumably “deemed paid” is relevant to prepaid tuition plans (ie the amounts are “deemed” paid when they are applied to each semester’s bill, at least when it comes to figuring out the remaining QEE balance). Is that the amount shown on a 1099-Q for a prepaid tuition plan? Is there a difference between that situation and a “deposit” that is applied in a later year?
This language specifically refers only to education credits and the tuition and fees deduction (which went away after 2020), which are distinctly different than QTPs. So yes, I would say that this doesn’t apply to 529 accounts.
Not sure what you are asking here. Payment for the student’s expenses occurs when the check is tendered (put in the mail or handed to the payee), or the credit card information is provided, or when the electronic transfer is initiated. It’s not when the school decides to eventually apply the payment to the student’s account. If I mailed a check to pay for spring tuition on December 27th, and the school received the check on January 3rd, and the payment showed up as a credit on the student’s online account on January 10th, the payment was made on December 27th.
My question is: how would the calculation in your example work with a prepaid tuition plan? Presumably the 1098-T would show the tuition each semester and the 1099-Q would show the distribution applied to it, even though the money was “prepaid” years before. You could foresee scenarios where a scholarship or other change causes some of that money to be refunded or applied to other expenses which requires a calculation to be needed of what part of the distribution is taxable.
Put another way, there must be some “deemed paid” analysis of non-cash transactions going on here to perform the tax calculation in the year the tuition is due.
I don’t know how prepaid tuition plans are accounted for in regards to 529 payments. I would forget about using a 1098-T form for documenting anything related to 529 payments. The form is supposed to be used for squaring payments received when claiming education credits, not for 529 stuff, and it’s well known that even then the form is very often inaccurate as prepared by the school and it doesn’t document all the possible QEE for the tax credits.
For 529 payments, focus on the basics. If the expense was paid in the same year that the 529 distribution to cover those expenses was taken, everything is fine. For a prepaid plan, the expense is the prepayment, even if it happens years before the student takes a class that the 529 payment covered.
That doesn’t make sense to me. The implication would be that a prepaid tuition plan either generates a 1099-Q at the time the money is paid in, or never generates one at all.
You have three elements: contribution, distribution and expense. You need to match distributions with expenses. The prepayment is a contribution and you have no way to match the distribution that ultimately results (contribution plus deemed earnings, perhaps even actual earnings if they attend a different college not covered by the tuition guarantee) to an expense until the kid actually attends a college.
I have no personal experience with 529 prepaid plans, but they do exist and are obviously contemplated by the language in Pub 970. I assume that a 1099-Q is produced by the 529 plan administrator for any year in which a distribution is made, but I can’t personally confirm this. Perhaps you should address your questions about 529 prepaid plans to an administrator of such a plan.
Edited to add: see FAQ #12 here for information on the Texas Tuition Promise Fund and how 1099-Qs are handled. FAQs | Texas Tuition Promise Fund
Florida pre-paid is treated like a 529 in most ways (I don’t think you can take partial semesters, so if you take the withdrawal, it has to be for tuition for that semester, and the room plan if you paid for that). You apply to take it, so if you have other scholarships and don’t want to use the funds for that semester, you just don’t request a distribution. I know a lot of people ‘let it ride’ for grad school if they had Bright Futures and other scholarship money, and one friend whose son went to an OOS school with a full scholarship thought it was a better financial deal to leave it for grad school. If they took the FPP, I think the schools apply it first (because of the way fees are/aren’t covered by BF). That usually causes the BF amount to be refunded to the student, and makes it taxable as a scholarship. The 1098-T reflects that the tuition is X, and then the scholarships received. You have to do the tax work, just like you would with a 529 (is it QEE? Can you take a credit?). I think the difference with FPP is that there is a set amount for the term (tuition, fees, maybe room) and unlike a 529 you can’t have the funds sent to you, they go to the school.
Been doing it for 5 years. The 529 issues a 1099-Q that precisely matches the total of every distribution we’ve taken that calendar year. The only important thing at time of payment is to either mark that payment as to the plan owner (me) or the plan beneficiary (my daughter), regardless who owns the bank account - because that controls which SSN appears on the 1099-Q.
Then I’m sure that I have receipts or other back-up that amounts to no less than the 1099-Q amount – in other words, I have receipts to cover the total 529 distributions of that calendar year. (In fact, I archive a paper-file for 7 years that starts with the 1099-Q, then an Excel that breaks down the 1099-Q totals into individual billing items, then the back-up for each of those items)
I don’t care if I paid something in December that was for the spring semester, as long as I have a tuition statement issued in December to match the amount. In other years, if market conditions suggested waiting, I paid the spring semester in January - and obviously accounted in in the NEW year.