I know, I know. Don’t ask for advice from strangers on the internet, but I am beyond irritated that I can’t get the answer to what feels like an easy question. I even went today to an appointment I made a month ago with the IRS, and they were no help. I won’t sue you if you’re wrong. lol We may not even claim this expense, but now I am just ticked off that this has consumed so much time, and I want some resolution. Is anyone on here a tax adviser or 529 expert who knows the answer to this question:
Can you claim as a qualified expense something that occurred before a 529 is set up but will be used for the school year when it is established?
Back story: We have a prepaid tuition fund that we are closing in September and rolling over to a 529, which will be great because then we can use it for more than tuition. We didn’t touch it for undergrad but are now using it for ds1’s grad school. He had been using a work computer but turned that in two weeks ago when he left his job. At that time, he bought a new computer. A computer is a qualifying expense, but, again, it was bought a month BEFORE the 529 is established. The best information I find is that the expense has to be in the same year as you file it and attend college. It will be, but it’s also before the 529 came into being.
Any idea whether we legally can pay for this from 529 money? I don’t want to run afoul of the law, but we are going to have trouble spending down the money because he got a huge tuition scholarship (good problem to have) so we would like to be able to claim all the expenses we can. Like I said, at this point I just want an answer.
If your 529 administrator approves the expense, I don’t think the IRS will parse the date of purchase and the date of reimbursement.
@BelknapPoint your thoughts?
My understanding is the expense just has to occur in the year it’s reimbursed. I don’t see why it would matter when in the year the account was opened at all as long as it was during that year.
I didn’t think the 529 people approve the expense; I thought you submit, and they cut a check (or whatever). I asked this question of the 529 plan we are going to use, and they wanted no part of IRS-related advice about what is and isn’t allowable.
cshell2, that’s my understanding as well; I just haven’t seen anything that said explicitly that you can incur qualifiable expenses before the account is open, and that’s what I’m looking for.
I doubt you’re going to find anything saying you can’t do this because except in your odd case where you’re rolling money in, there really is no advantage on the Federal level to someone depositing money in a 529 account and then taking it right back out for an expense, so why would they care? As long as the qualified expenses in the year are equal to or greater than the withdrawal you should be fine.
You are right; there is no “529 administrator” who needs to review and approve (or not) each expense. That determination is made by the account owner or custodian based on their understanding of the tax law and IRS guidelines. In your particular scenario, I don’t know the specific answer that will most please the IRS, but I agree with cshell2: if the qualified expense was paid in the same calendar year that the 529 distribution is taken, the odds of there being a problem are very low.
That makes sense. Thank you.
I looked again at IRS Publication 970 (https://www.irs.gov/pub/irs-pdf/p970.pdf), and I think it supports the view that you can do this. A 529 is a “QTP” as defined in this publication, and the computer is a “Qualified Higher Education Expense,” as described on page 52. If you go through the calculation “Figuring the Taxable Portion of a Distribution,” also on page 52, the question is whether the distributions you take in any tax year are greater than the amount of qualified expenses. “To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses.” There is nothing to suggest it matters when in the relevant tax year you set the QTP up. Of course, I am not a tax expert, so you should review all of this for yourself! I also need to thank you for asking this question, as I just bought a new laptop for our S19 to take to school, and I had been thinking we couldn’t use 529 funds because a computer is not “required” by the school. Reviewing the IRS document, I realized that condition has been removed so long as the computer is for school use. Good news for me!
Yes, now allowing computers is a big change from when my kids did undergrad. Glad you can use the info.