Help - 529 questions from clueless parent

Paying for College
1

I need to decided asap and could use some help. Reading the forums as much as I can too. Thank you so much.
COA TUITION 30000
ROOM/BOARD 10000
BOOKS 1000
TRAVEL 300
TOILETRIES/PERSONAL 1000
TOTAL COA: 42300

Financial Aid Scholarship 10000
Subsidized Loan 3500
Unsubsidized Loan 2000
TOTAL AID: 15500

FINAL Family Cost $26800
529 Plan Balance $37000

-Should/Can the 529 be used to pay the full family cost?

  • Should the 529 money go to the school, or to the parent who sends to the school?
    -Is there an advantage or disadvantage to sending 529 funds to the school directly?
    -Can the following be paid with 529 money: dorm room frig, Friday night movie, clothing,
    soap, laundry detergent, cell phone, tuition insurance, air fare, club fees?

    -Do 529 disbursements get disclosed on income tax return?
    -Do 529 disbursements get disclosed on next years FAFSA or CSS Profile?
    -Do 529 disbursements hurt need based financial aid?
    -Can we decline federal loan and use 529 disbursements instead?
    -Advantage/disadvantage of using 529 instead of federal loans?
    -If I pay full year '18/19 tuition by December 31,2017 how does that benefit my income tax [return] 2017?
    -Do scholarships, grants and loans count as income?
2

No…these are not 529 qualified educational expenses.

Why wouldn’t your kiddo get a job to help pay discretionary expenses?

Is this 529 balance of $37,000 what you will be using for one year or for multiple years?

Loans never count as income. But grants and scholarships used to pay for anything above the costs of tuition, fees, and books would be taxable income for the student.

Yes.

Please clarify…is your kiddo an incoming freshman with $37,000 in a 529? Do you have sufficient income or savings to cover your family contribution of $26,000 plus to this college…and think about all four years if this is an incoming freshman.

3

You need a four year plan to pay for college. Think ahead. If you spend all your 529 this year, how will you pay for future years?

Your federal student loan eligibility is
5500 freshman year (includes both subsidized and unsubsidized portions)
6500 sophomore
7500 subsequent years

The federal student loan is the best student loan deal out there. If you pay that portion with your 529 instead, you cannot borrow the 5500 you passed up in a subsequent year if you are short of funds later. (There are other loans, of course, just not at these terms.)

The best federal tax benefit for education is the American Opportunity Tax Credit which only applies to the first 4000 of tuition expenses. Paying more than that in advance has no tax benefit. You cannot “double dip” and use money from a 529 to qualify for AOTC because the 529 funds already have a tax benefit. However, anything you pay with a loan or wages or from a non tax advantaged account qualifies.

4

IRS Publication 970 will answer must of these questions.

-Should/Can the 529 be used to pay the full family cost?

The 529 can be used for any qualified educational expense. Money must be withdraw in the year that the expense occur. There are rules about coordination the AOC and the 529 distrbutions. See P970 for detail.

  • Should the 529 money go to the school, or to the parent who sends to the school? -Is there an advantage or disadvantage to sending 529 funds to the school directly?

-Can the following be paid with 529 money: dorm room frig, Friday night movie, clothing,
soap, laundry detergent, cell phone, tuition insurance, air fare, club fees?

Short answer no. These are not qualifed educatioan expepenses (QEE). See P970. Note QEE for the 529 is different than QEE for the AOC.

-Do 529 disbursements get disclosed on income tax return?

You will get a tax form and tax programs will help you detemine what if any tax is due.

-Do 529 disbursements get disclosed on next years FAFSA or CSS Profile?
-Do 529 disbursements hurt need based financial aid?

-Can we decline federal loan and use 529 disbursements instead?

You can always decline loans. But the federal stundent loans can only be taken out during the year offer. So for freshman year you can borrow 5500. Once freshmen year ends, that loan is no longer availiable.

-Advantage/disadvantage of using 529 instead of federal loans?

Loans have interest costs.

-If I pay full year '18/19 tuition by December 31,2017 how does that benefit my income tax [return] 2017?

You could have more QEE availiable for the AOC but it doesn’t look like you need it.

-Do scholarships, grants and loans count as income?

Loans never count. Scholarships and grants count if they exceed AOC QEE (basiclly tuition plus required supplies). As far as I know neither count for determining support. See P970.

5

Can the following be paid with 529 money: dorm room frig, Friday night movie, clothing,
soap, laundry detergent, cell phone, tuition insurance, air fare, club fees?

No…these are not 529 qualified educational expenses.

Why wouldn’t your kiddo get a job to help pay discretionary expenses?
************If he can get a job, he will.

Is this 529 balance of $37,000 what you will be using for one year or for multiple years?
***********That is the total balance. Is it better to spread use over multiple years?

-Do scholarships, grants and loans count as income?

Loans never count as income. But grants and scholarships used to pay for anything above the costs of tuition, fees, and books would be taxable income for the student.
**************I only intend to pay for things that will not count as income for me or my child.

-Can we decline federal loan and use 529 disbursements instead?
Yes.

Please clarify…is your kiddo an incoming freshman with $37,000 in a 529? Do you have sufficient income or savings to cover your family contribution of $26,000 plus to this college…and think about all four years if this is an incoming freshman.
*************freshman with $37000. I was wondering if it is advisable to use the full amount as soon as possible then get loans later if needed.

6

The federal student loan is the best student loan deal out there. If you pay that portion with your 529 instead, you cannot borrow the 5500 you passed up in a subsequent year if you are short of funds later. (There are other loans, of course, just not at these terms.)
***********so, not adviseable to turn down loans?

The best federal tax benefit for education is the American Opportunity Tax Credit which only applies to the first 4000 of tuition expenses. Paying more than that in advance has no tax benefit. You cannot “double dip” and use money from a 529 to qualify for AOTC because the 529 funds already have a tax benefit. However, anything you pay with a loan or wages or from a non tax advantaged account qualifies.
*********** confused. Do you mean more than $4000 from the 529 has no tax benefit?

7

Your kid already HAS the federally funded student loan IN his financial aid package. That’s the subsidized and unsubsidized loans.

Any additional loans will need to be taken out by you…or co-signed by you. The loans you take out will never be viewed as income. They are loans.

Any amount you pay for your kid to attend college will not be viewed as income for him. This would include tuition, fees, room, board, books…even personal expenses. What you pay for those is not considered income.

It sounds like you need almost $27,000 as your family contribution for just this one year.

As noted above…how do you plan to pay for the following three years? If you pay using your 529, that will leave only $10,000 for subsequent years.

If you only use 1/4 of the 529 this year…where will the rest of your family contribution come from??

8

As noted above…how do you plan to pay for the following three years? If you pay using your 529, that will leave only $10,000 for subsequent years.

If you only use 1/4 of the 529 this year…where will the rest of your family contribution come from??

***** Better to use all now, or split 529 over 4 years? Loans & other savings (non 529) will cover later years if we use 529 now. Does that make sense?

9

Not sure how OP plans to pay the 18/19 costs by 12/31/17, since we are in late April 2018 now.

It matters a lot as to what school is involved, and do they meet full need. If you spend the 529 money now, and have lower assets next year, will the Financial Need based scholarship increase next year. This can vary by school, and be dependent on lots of other factors like family income and other assets., other siblings in school, etc.

10

Not sure how OP plans to pay the 18/19 costs by 12/31/17, since we are in late April 2018 now.
************ Yikes, meant to write 12/31/18!! We still have savings and income, but just trying to maximize benefits of the 529.

11

One important question: who owns the 529 plan? If it is owned by the student or the parents, the distribution is not reported on FAFSA, but the balance is an asset - so if you don’t use it, the balance will still be part of the aid calculation, and might be worth using (take the subsidized loan, use the 529 to pay the balance. The loan will count toward AOC.

However, if the 529 is owned by someone else, you might be better off waiting to use it, and spread it over multiple years. It would not be taxable to the student, but it is considered a gift - meaning gift tax could be owed if the distributions is high enough, and it is reported as non-taxable income on the FAFSA, which will impact aid.

12

One important question: who owns the 529 plan? If it is owned by the student or the parents, the distribution is not reported on FAFSA, but the balance is an asset - so if you don’t use it, the balance will still be part of the aid calculation, and might be worth using (take the subsidized loan, use the 529 to pay the balance. The loan will count toward AOC.

However, if the 529 is owned by someone else, you might be better off waiting to use it, and spread it over multiple years. It would not be taxable to the student, but it is considered a gift - meaning gift tax could be owed if the distributions is high enough, and it is reported as non-taxable income on the FAFSA, which will impact aid.

13

I own the plan. In terms of using now or spreading out, we will either borrow more now or much more later.Not sure which is better. Actually, not needing to borrow is better

14

From your outline above, you’ll have about $40k in room and board over the years and you have about that in 529 money. I’d use it for that, or at least cover the first two years of r&b and then use the other half of the 529 for tuition over the 4 years, still planning on paying for at least $4000 with ‘un-tax benefited funds’ (scholarships, 529) so that you’ll qualify for the AOTC

For tuition, you have the scholarship, but still will have about $20k per year to cover. Use the student loans, use whatever ‘pay as you go’ money, use some of the 529 money.

As for the travel, books, etc. I’d plan to pay those as needed, and by that I mean the student should be paying for those. You’ll be surprised how thrifty students can be at finding used books and a ride with friends when they are paying. My daughter just told me that her boyfriend’s parents have been paying for the gas in his car for the entire time he was in school. My daughter has had a car for 4 DAYS, and she’s already complaining about paying for the gas. She walks or rides her bike.

Son should take the student direct loans all 4 years. I don’t think you’ll have enough money if he doesn’t.

15

Any gift tax, if actually owed, is paid by the gift giver, not the recipient. And there isn’t anything to actually pay until the gift giver has exhausted his/her lifetime gift tax exemption of $11.2 million (this is the current, 2018 amount). Before reaching that limit, there is only a reporting requirement for the part of any gift in any one year to each person that exceeds $15k (this is the current annual exclusion amount). So, gift tax is never an issue for a student who benefits from a 529 distribution, and it’s highly unlikely that gift tax will ever be an issue for anyone who gives money to a student through a 529 distribution.

16

Yes, the student wouldn’t be responsible for any gift tax, but it is still a gift, and reportable on the FAFSA as a resource (non-taxable income), which could result in less aid the following year. It is best to use 529 funds from grandparents or other relatives during the final year.

And if the gift is above the exclusion amount, the donor needs to be aware they do need to file a gift tax return, even if no tax will be due.

17

@CTScoutmom actually…the FAFSA and Profile forms now use prior prior tax year…so really the income wônt be reported unless it is TWO years prior to the last FAFSA.

For example…if the kid’s senior year is 2022-2023, the 2020 tax year info will be used, and that FAFSA will be available for filing in October of the kid’s junior year of college. So…any “income” from 2021 and after won’t be included if this kid graduates on time.

Even her junior year would be 2021-2022…using the 2019 tax year.

18

Being obligated to pay a gift tax to the IRS and being obligated to report untaxed income on a FAFSA are two very different things.

For a student on the traditional four year academic plan, anytime starting with spring of sophomore year works just fine.

Completing IRS form 709 is a paperwork drill. Gift givers will not owe a penny of gift tax until the total of all gifts given that have exceeded the annual exclusion amount reaches $11.2 million.

19

Assuming that the parent owns the 529 and the child/student is the beneficiary, then the question remains of how the money should be disbursed. From my reading, the cleanest way to handle the transaction is to send the money from the 529 directly to the student and have the student write the check to the school. That keeps the parent out of the loop for tax accounting.

One pitfall is that the 529 plan might take its sweet time distributing the money, e.g. within 10 business days. Then the money must be deposited in the child’s checking account to clear before paying the college bill. So planning the dates is important.

Others have covered it and provided references. But generally speaking, to keep it clean, the 529 money should be used for tuition and published room and board costs only. Also, the money can be used for a computer. The 529 money cannot be used for travel to/from school, living expenses like laundry, copies, insurance, travel for study abroad, etc.

My approach is to disperse the money in an indisputable fashion and keep myself out of the tax loop. If any money remains, it can grow for a future grandchild.

20

one other reason not to use bulk of 529 monies in 2018 is the AOTC credit. if you pay at least $4000 out of pocket for tuition and fees (room and board does not count) and have an AGI of $160K or less (or 80K if single) - then you can get back on taxes $2500. You can take this credit 4 times over the years for your kid.

***(The full American Opportunity Tax Credit may be claimed by people with adjusted gross income (AGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. The credit is gradually reduced at higher income levels up to $180K.)