<p>My daughter is a freshman in college. she got partial scholarship/grant and loans for her college. I am very confused on how much should I withdraw from 529 that will be the right amount to be qualified for college expenses(for tax purpose). For example, on her 1098T form column 2 "Amounts billed for qualified tuition and related expenses" is $7700, on column 5 "Scholarship or grants" is $8500. I withdrew $1000 from 529 to pay some of her expenses, but I was told I could withdrew far more than $1000 that still qualified for no penalty. Can you help me to identify what is the qualified expense and how much is the right amount I can withdraw from 529? Thank!</p>
<p>The details for 529 distributions are in IRS Pub 970, Chapter 8:</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a></p>
<p>Rule number one is that you have to take the 529 distribution in the same tax year as the expenses were incurred for it to be tax-free. So for any expenses incurred in 2013 it is too late to take a withdrawal tax-free for them. Hope you took the $1000 distribution in 2013 or you will have to use 2014 expenses to make it tax-free.</p>
<p>The chapter lists what are qualified expenses for tax-free 529 distributions. Just note and read the coordination section, you can’t use the same expenses for more than 1 tax break, be it tax-free scholarships, tax-free 529 distributions, the AOTC or other education credit, the savings bond education interest exclusion etc.</p>
<p>From the 1098T info you posted, your daughter had $800 of taxable scholarships/grants in 2013. Chapter 1 in pub 970 discusses this. You can add required books and supplies to the $7700 of expenses if you kept receipts. Unless she had more than $6100 of total income she wouldn’t be required to file or owe any tax on the $800.</p>
<p>Thank you so much for the information! It is very helpful! I will definitely take time to go through Chapter 8 and try to identify which expenses are qualified. In the mean while, I still have a quick question, is it a good idea to use 529 money first or use the loan money from her package first and save 529 money for the future? There are about $80k in 529, and she is planing to go to graduate school as well. She is qualified for some grants and loans. Her school is a public college cost about $27,000 a year. Is it necessary to take loan money? I am not sure how difficult it is to earn money from graduate school(such as work as TA). Thanks! </p>
<p>Are the loans subsidized or unsub? I’m not that familiar with the loans but I believe there are origination costs and the unsub will accumulate interest while the student is in college. Personally, I’d use the 529 money now being that it’s that much. How much are you paying out of pocket each year now?</p>
<p>Plans to go to graduate school don’t always work out. Students change their minds or can’t get in. Unless there is a younger sibling to transfer the 529 to, you could end up paying tax on the earnings if the plans don’t work out.</p>
<p>I’m not that familiar with graduate school funding either. What is the field? I think it varies, STEM being the best funded. It also could be that funded grad school would only be for those aiming for a PhD, not just a masters. If you post the field others could have more knowledgeable input.</p>