When you say “taking the entire amount out in one year,” do you mean the entire 529 balance, even if that’s more than the qualified expenses you would be paying in that year? If so, that’s a bad idea. Anything taken in excess of the qualified expenses that year would be considered a non-qualified distribution, and income taxes plus a 10% penalty would be owed on the earnings portion of the non-qualified distribution.
If bills are due at awkward times near beginning of year, you could withdraw from 529 and pay the bill before the end of the year, or you (if you can swing it) pay the bill out of your own money and then pay yourself back with the 529 later. I like the flexibility of withdrawing to myself (actually my D) rather than the school and fortunately can do it. You could time withdrawals to later in the year for more tax-free earnings and pay yourself back. Just keep good records of withdrawals and payments, none of your payments get reported to the IRS until they ask you for taxes.
@BelknapPoint now you have me worried! Our spring bill was due Jan 5, I think? I requested the disbursement online the week before (I don’t remember the exact date, but somewhere around Dec 26). Are you saying since I took the money out in 2017 but the college didn’t post it until 2018 I might have issues?
This doesn’t work if I want to pay for 2018 expenses in 2018 (the main reason being to maximize over the student’s entire college career the opportunities for tax credits).
This works as long as the payment of the bill and the later distribution from the 529 to reimburse that payment happen in the same tax year.
What’s important here is when the payment was actually made (i.e. when the 529 administrator sent the money to the school), not when the payment is posted by the school. The disbursement from the 529 account and the payment of the expenses for which that disbursement is being used need to happen in the same tax year. When the money is being sent directly from the 529 administrator to the school, it’s less likely to be a problem.
Don’t be thinking I’ll use the 529 for the first year and figure out the rest later. Make a four year plan to pay for college. If you don’t have enough money in the 529 to pay for all four years, you may want to use federal student loans or the American opportunity tax credit each year.
When you pass up a freshman federal loan or tax credit, you can’t get more as a sophomore. Federal student loans at 4.45% plus the flexible repayment plans (and whatever loan forgiveness plans survicenthe current administration) are the best deal out there if you need to finance part of the costs, even if all you qualify for is the unsubsidized version.
Financial aid wise, each dollar in your 529 plan is a parent asset. Each dollar of parent asset reduces your financial aid eligibility by somewhere between 5 and 6 cents so getting rid of assets will not give you a windfall in financial aid.
True, but when you pass up a freshman tax credit, you don’t get that money period. For what reason would you decide not to take advantage of a $2,500 tax credit, if you were eligible to take it in all regards?
If a parent doesn’t put money in a 529, it’s probably going to be somewhere else that would still need to be reported as a parent asset. The benefit of a 529 account is not to shield money from FAFSA or Profile asset reporting (obviously); it’s to take advantage of long-term tax-free growth and tax-free use when used for qualified education expenses.
Thank you for all of your help, @BelknapPoint! It is greatly appreciated.
Just to clarify, I think what you’re saying is what’s important is that the 529 distribution and the credit card charge happen in the same year. Once the credit card has been charged, the bill is paid.
Correct.
Are you saying here you already paid college bills in 2017 to get the credit in 2017 and Spring 2018 will be your last semester and you want to get that credit as well? Because I don’t understand the maximize comment if there will be a fall 2018 bill.
BelknapPoint: Um – are you a CPA? Or just a very, very informed parent? You don’t have to answer. I’m just super impressed and grateful for your responses. I’ve been pouring over articles for weeks and simply can’t find straightforward answers. And if I’m having these questions, I’m sure others are, too. Very grateful for this site and the experts on here!
I have one tuition bill that is due very close to 1/1. They always used to post all the tuition and fees in Dec but none of the credits like scholarships until Jan. I noticed this year it was all dated 1/1. I’ve always kept all charges in the tax year due/paid and never paid spring tuition early.
Like Belknapoint states, there is often a little leeway in the due date. D’s school doesn’t charge a late fee if they are still getting funds in. The very first year I panicked because the bill was due 8/11 and she hadn’t even arrived on campus yet, none of the scholarships had arrived or been posted. They told me not to worry about it and I don’t think anything got posted until well into August.
Both schools I deal with allow payment by credit card (both had no charge for this, but now one does charge) or an ACH from my account without charge, so no need to write checks and send them in (except to teach student that it really does cost money).
There was a mix up this semester with one daughter’s bill. The school refunded too much to me and now I have to pay it back. If I pay by credit card, I have to pay a fee for the money they refunded in error! But I can pay it from my checking account (which is where they refunded it) without charge.
Education tax credits can only be taken for qualified expenses paid during the actual tax year. Schools often bill for (and sometimes expect) payment for the entire academic year in the same calendar/tax year. For example, billing for fall 2017 in July 2017 with payment due in August 2017, and billing for spring 2018 in November 2017 with payment due in December 2017. Following this routine and making payments under these deadlines means that there are only four tax years during which the taxpayer will qualify for a full education tax credit (there may be miscellaneous qualifying payments in a fifth tax year, for books or other smaller expenses). In order to qualify for maximum education tax credits, qualifying payments should be made over all the tax years during which eligibility for the credits is met. For a traditional undergraduate college career, this would be five tax years, from fall of freshman year to spring of senior year. This would let an eligible tax payer take advantage of four years of the American Opportunity Tax Credit and at least one year of the Lifetime Learning Credit.
Not a CPA, just an informed (uh, maybe slightly obsessive/compulsive?) parent who wants to follow the rules but also doesn’t want to spend a dime more than is necessary, especially when it comes to taxes.
Bingo, Belknap. Same here. Not just one dime more in taxes but not even one minute more worrying that I’ll have to show a paper trail to prove I spent my own saved money on legit QHEE. I’d rather do it in the way that causes the least issues for me. I think all of this has helped me decide and see, with clarity finally, that I should be disbursing 529 funds to my son through ACH/EFT. Then having him pay the bill to the school through check or electronically. And even more than that, I really like the idea of him being invested and actively involved in paying the bill. I feel like too often, the “magic money mommy” takes care of things and nobody really understands how to budget or save. Or why I work so hard and clip coupons.
And on the subject of late fees, service charges, etc… the website of the bursar’s office is NOT the final authority.
I made phone calls to actual human beings when I had a timing issue and was always pleasantly surprised how eager to help the folks in the bursar’s office were. There are certain policy issues they have no control over (a school switching from credit card with no upcharge to an upcharge is likely to be a change made at the top) but other issues-- timing, etc. they’ve got a surprising amount of leeway. One of my kids got money from an outside source whose timing would have meant that either we pay the money upfront (cash flow issues) and wait for a refund, or get hit with a late fee once the outside organization sent the payment.
The person I spoke to said, “well why don’t we make that portion of your son’s tuition due on the later date so you don’t get the late fee?” which was well beyond what I expected (I was hoping for a reduced late fee since they knew the money was coming).
A different kid had a couple of funky charges/credits due to a fellowship and how it was posted- for my own financial reasons I wanted it paid all at once, not spread out monthly. It was a university funded fellowship, not an outside source- and once I called, they were happy to lump the payment for me (kept everything easy for recordkeeping).
Don’t be afraid to make a phone call.
I would say BelknapPoint is one of the most knowledgeable posters I have ever seen. Having searched this forum for a number of obscure questions over the past couple of years as well as asked some of my own, BelknapPoint is usually one of the main guys to provide detailed responses. I do like to verify information I read here and I don’t believe I ever found a mistake in anything BelknapPoint has said. I can only imagine how many people BelknapPoint has helped navigate through paying for college. This seems like a good time to says thank you!
Here’s a warning that even if the 529 payments are made to your son, and he then uses the 529 money only to pay for or reimburse qualified education expenses, there’s still a good chance that the IRS will want an explanation. It happened to my daughter, and I won’t be surprised if it happens again. When she initially got the notice form the IRS, I freaked out a little bit and experienced some righteous indignation (what!!?? we haven’t done anything wrong!!), but I quickly learned that this is a fairly frequent experience, and the IRS is easily mollified. I probably went overboard in responding to the IRS with documentation, but I wanted to be sure that my daughter’s position was fully supported. It took a couple months, but the IRS finally sent a form letter closing the matter without anything owed. If it happens again I’ll be less stressed and simply respond with a letter saying that all 529 money was used for QEE that wasn’t necessarily reported on the 1098-T form that the school produces.
The problem is that the only thing the IRS has to go by is a comparison of expenses paid to or billed by the college, as reported by the college on a 1098-T that the IRS gets a copy of, and the 1099-Q showing 529 distributions for the year, as reported by the 529 administrator. Since the 1098-T never shows room and board expenses and rarely shows expenses for books and other required course materials (both of which are 529 QEE), the IRS computer sees a discrepancy and doesn’t like this, resulting in an automatically generated notice. Hence the stress and wasted time to show the IRS that they are wrong. Your tax dollars at work.
There’s probably a small benefit to my daughter in having her do the payments this way; she’s very responsible and already has a good feeling for the value of education. The person who really could have used this exercise was me back when I was her age. I didn’t take college nearly as seriously as I should have. I knew how much college cost for me (certainly a lot less than it does now), and I knew that my parents were footing most of the bill, but writing the checks myself would have been a wake-up call. Even back then, the idea of wasting my own money (or money that was coming through me) wouldn’t have been tolerated.
You are very welcome, and I’ll say thank you back for your generous compliment.
You make a very important point: never completely trust the information you get here, or from any similar public forum. Always verify as best you can. This is one reason that I will frequently add a link to the information I am providing, so that it can be seen directly from the source, whether that’s the IRS or a school’s financial aid web page.
There are lots of very informed CC members here, many of whom seem to have a niche specialty. Whether that’s someone like sybbie (New York City and state matters), twoinanddone (athletic scholarships, among other things), or blossom (who really seems to know everything about everything), there’s always someone who unselfishly shares their knowledge.