Paying with 529 Funds

<p>we received our letter in March, 2011 for our 2009 return (so about a year later). in retrospect, maybe the fact that we have 2 in school contributed to our being selected. maybe a little more complicated for them to match everything up. who knows? the impact on our taxes would have been negligible as well. the income on our withdraws was < $500. irs probably spent more investigating our case than they would have collected. </p>

<p>getting the letter is a little like seeing a police car in your rearview mirror. you know you havent done anything wrong, but your heart starts racing a little…</p>

<p>^exactly! I hate that feeling.</p>

<p>@swimcatsmom, thanks for the explanation. My son’s rent for 12 months is just a little less than what I paid for the dorm for 10 months. And his food bill is considerably less. So, good. It looks like we’re going to be okay. I did start gathering my receipts in more orderly fashion, though, in case that police car pulls up behind me and flashes his lights!</p>

<p>Now, after reading this thread, I realized I did things all wrong! I deposited a large amount of money (10K) in the 529 plan for 2 kids. After finding out it could not be paid to tuition management services electronically, or to the realtor for monthly rent. I withdrew most of it so I could make those electronic payments. Last time I dealt with the IRS it took 6 months to work out!! Darn.</p>

<p>Just have the 529 administrator send the check directly to the bursar’s office and keep the money out of the hands of anyone else. In my case, the 529 admin cuts a paper check and mails it, so you may need to allow two weeks for delivery. At the end of the year you get a statement from them saying how much was withdrawn for the year, and the college sends a statement showing the allowable expenses.</p>

<p>I matched up the 1098s and the 1099s, wrote a letter explaining that there were also room and board costs and included the university information on that. Then, in looking at all of this more carefully, realized that I had not subtracted the $4000 in expenses that were used to figure the American Opportunity credit.
It all seems very complicated.</p>

<p>Coordination With American Opportunity and Lifetime Learning Credits
from IRS pub. 970
An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.</p>

<p>Example 2.</p>

<p>Assume the same facts as in Example 1 , except that Sara’s parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).</p>

<pre><code>Total qualified education expenses $8,300
Minus: Tax-free educational assistance −3,100
Minus: Expenses taken into account
</code></pre>

<p>in figuring American opportunity credit −4,000<br>
Equals: Adjusted qualified<br>
education expenses (AQEE) $1,200</p>

<p>^^Yes, you can’t “double dip” - i.e. you can’t use the same expenses to claim more than one tax benefit.</p>

<p>The good thing is that if the reason your 529 account withdrawals are taxable because of claiming the AOC, you only have to pay the taxes, not the penalties.</p>

<p>I have my bank account associated with Tuition Management Systems.
After the monthy payment takes place, I transfer money from a 529 account to my bank account.
I have 4 529s and one utma account for her.
I have emptied out one 529 account already.</p>

<p>marymac - I’m glad to hear that transferring money from the 529 accounts hasn’t been a problem. I’m a bit upset now that I took out a large amount of money recently, the first time all year, from the 529 accounts recently not knowing it may flag the IRS. Of course it’s below what their educational expenses are for the year. </p>

<p>orangepurple - Thanks for reminding me to back out the 4K. 4K plus what we withdrew from the 529 accounts may be cutting it close for D’s educational expenses. Maybe I’ll get an accountant to help me this year. But, finding one who is up to date on all this may be hard. So far, I tried hiring 3 for last year taxes but found I knew more than they did! An I’m very confused.</p>

<p>We just made our first 529 withdrawal. It would have been more complicated to transfer the money directly to the school (signed and notarized form, get that to the 529 plan holder, wait on hold to get the account number for the school), so I asked the guy at Fidelity if it would cause problems with the IRS if we just transferred the money to our checking and then paid the bill electronically from there.</p>

<p>He pointed out that the IRS has no way of seeing where the 529 money GOES; they are only notified that there has been a withdrawal (and I’ll get a corresponding 1099). So the way the money is transferred shouldn’t make a difference in whether or not the IRS decides to contact you–the trigger must be something else. I’m glad I saw this thread so I’ll be sure to keep records (and thanks for that other tax info, orangepurple).</p>

<p>I tried getting a check payable to the college; was told I couldn’t do that over the phone, so had this one sent to the kid. But this time, unlike previously, the 529 phone rep asked if it was for qualified expenses. Maybe they can mark it that way? Who knows. Anyhow, I had that check made out for the exact amount of payment, so it will be easier to track the money. I am assuming I will have to go through the whole thing again for the next two tax years. And then, we’ll be done.</p>

<p>It was just so easy for the first few years, when basically, it seemed like it was all on the honor system!</p>

<p>^I have withdrawn money in all sorts of amounts and had it directed to all sorts of places. Kid got the check; wired to my bank account, I got the check, school’s bursar got the check, etc. And every single time, they have asked me if it was for qualified expenses. One time, an employee just casually mentioned that they were required to ask me that prior to disbursing funds. I don’t know if it’s my kids’ 529 plan fund’s <em>company</em> that requires their employees to ask that prior to disbursing, or if it’s the IRS that requires fund company employees to ask that question first. But at my kids’ plans they have always asked. Like you said, orangepurple, it has felt like we were operating under the honor system. “Yes, mom, I promise I’ll use it for qualified expenses.” And that has been good – but also a little weird, I’ve always thought.</p>

<p>We have also always been asked if it is for qualified expenses.</p>

<p>Coordination With American Opportunity and Lifetime Learning Credits
from IRS pub. 970
An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.</p>

<p>My understanding is that the only tax-free distribution from a QTP is interest or dividends from that account. For example: if $10,000 in the account made $100 interest to equal $10,100, and all of it was withdrawn for qualified expenses, only $100 would be considered a tax free distribution. Am I correct?</p>

<p>My 529 fund administrator told me that if the fund make a direct payment to the school, the fund will send a 1099 to my DD with her SS number on it. While if I request a check/transfer in my name then the 1099 will be in my SS number. All in all, there is no difference if the fund is a qualified withdraw. Its where you want to show it on who’s 1040 tax returns.</p>

<p>Yep. That’s how our plan (Pennsylvania 529 with Vanguard) reported it. First year, we paid direct to the university and the 1099 came to my daughter. No word from IRS. Second year, we took the withdrawal and the 1099 came to me. I guess since the 1099 came to me, and I didn’t have any 1098-Ts in my name, we triggered a tickler in the IRS software. Just my guess. All worked out in the end.</p>

<p>And in my case, I have the fund pays directly to the school. The last thing I want is the IRS stick its nose in my already complicated return becuse of this 529 payment. My fun administrator will NOT send any fund to ANY school without a signed original withdrawl form in their hand, so I have to schedule at least 2 weeks ahead before the school’s deadline for payments.</p>