Quick 529 question

Paying for College
1

<p>This will be my first year that I take a distribution from my daughter's 529 and have a few simple questions.</p>

<p>1) For the first semester she was on a 9 meal plan which only provided part of her food. The second semester, she was not on a meal plan. Can I use the COA figure for her board cost for both semester. Pub 970 indicates that is the maximum you can take but what if the actual food cost was lower? Can you use the higher COA figure? I do have records for food but they are not complete since we prepared most of her food and dropped it off as needed (severe food allergies). She is living in a dorm.</p>

<p>2) If I make sure that the distribution is less that qualified expenses then will I need to report anything on my tax return. I need to use a 1040A in order to qualify for the simplified needs test. From other posts I have read if the amount is greater than qualified expenses then it (earnings portion) has to be declared as other income which requires an form 1040.</p>

<p>3) For books, I assume I need to use actual cost.</p>

2

<p>Also consider whether you paid $4000 of tuition/fees during the calendar year with non-529 dollars in order to take advantage of the American Opportunity Tax Credit.</p>

3

<p>1) Yes, you can use the higher COA figure. Pub. 970 says that you can use the greater of either a) the room and board COA figure, or b) the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.</p>

<p>2) There is nothing to report as long as your 529 distributions for the tax year don’t exceed the qualified education expenses that were paid during the tax year. But, QEE that were paid must be reduced by any amount that was tax-advantaged; i.e. paid with non-taxable scholarships/grants or used to take a tax credit or deduction.</p>

<p>3) Yes, use actual cost, as in what was paid by the student to buy or rent the books.</p>

<p>Also take note of what Madison85 is telling you - that you may be eligible for the American Opportuity Tax Credit, among other education tax credits and deductions. You may be able to claim the tuition and fees deduction or one of two generous education tax credits and still file using the 1040A.</p>

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<p>@noname87‌ Here are two articles you might find helpful. I think you should also speak to your financial advisor and accountant on any 529 related tax questions.</p>

<p><a href=“Avoid these 529 withdrawal mistakes to maximize savings”>Avoid these 529 withdrawal mistakes to maximize savings;

<p><a href=“4 things you don’t know about 529 plans - MarketWatch”>http://www.marketwatch.com/story/4-things-to-know-about-529-plan-withdrawals-2013-09-09&lt;/a&gt;&lt;/p&gt;

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<p>Thank you for the clarifications.</p>

<p>I do have two last questions. </p>

<p>1) I (the father) am the owner of the 529 account. My dd is the beneficiary. Does it matter who the check from the 529 plan is made out to. Based on posts on this forum it does not seem to matter. We will both file tax returns.</p>

<p>2) My dd grants (Pell, institutional grant (from state university system)) and scholarships exceed her qualified AOC expenses. I know she can declare some of these grants as taxable income on her return to enable me to take the AOC. My question is that some posts here suggest that you can use the grants for room and board instead of tuition and then pay the tuition with non grant money which would allow the AOC. Is that right? If I do that, would the portion of grants used for room and board be taxable income. I know the school did use her grants to pay for her dorm room.</p>

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<p>eCoachJen, the first article helped but the comment section proved invaluable. I recommend reading them. It appears that the taxable portion of the scholarship does not reduce the amount of qualified expenses (room and board in my case) for the 529 distribution. The second article provided some insight on the first question above. It seems that as long as the distribution does not exceed the qualified expenses (no taxes due or penalties) then it does not really matter whose name is on the check. </p>

<p>At some point I need to find a good tax man for these question. I suspect that finding someone with in depth knowledge of FAFSA, FA and IRS codes might be tough. Some posters here seem to have a good handle on some of these issues. I am impressed by many of the people here that actually quote the actual sections of the IRS codes and others like yourself that post links.</p>

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<p>Who the distribution is made payable to can make a difference. The 529 plan administrator will issue a 1099Q form at the end of the tax year that matches the tax year distributions with the SSN of the person receiving the distribution. The school will likely issue a 1098T form that covers qualified education expenses for the tax year incurred by the student.</p>

<p>In your case your distribution options are: a) distribution goes to the student/beneficiary; IRS sees 1098T reported QEE and 1099Q reported 529 distributions for the same person and is happy; b) distribution goes to the account owner (you) and the IRS sees a mismatch between 1098T reported QEE (student’s SSN) and 1099Q reported 529 distributions (your SSN); this has sometimes resulted in a letter from the IRS asking for an explanation and supporting documentation that the 529 distribution was actually used for the student’s QEE; c) distribution goes directly to the school and is reported on the 1099Q under the student’s SSN so no IRS issues, but the school may mistake the 529 money as an outside scholarship, possibly resulting in decreased financial aid if the student is receiving same; not a big deal but a hassle to straighten things out with the school.</p>

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<p>Yes, that is right, and the portion of grants used for room and board be taxable income. Just be careful that the portion of tuition that you pay with non-grant money (in order to take advantage of the AOTC) is not paid with 529 funds.</p>

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<p>But you actually have to pay the QEE you are claiming as a credit from non-tax benefited funds, not 529 funds. So in your case, say QEE of tuition/books/fees are $20k, and room and board is $10k and her scholarships, grants, etc are $22k. If you pay QEE with the grants and $2k of the room and board with grant money and $8k with 529 money, she must claim $2k as unearned income and you get no AOTC credit because you didn’t pay anything with non-benefited money.</p>

<p>If you claim $16k of QEE from the grant money, pay $4k from your own pocket, have your daughter claim $6k as unearned income from the grants/scholarships, and pay whatever is left from 529 money, you are good and can take the AOTC. </p>

9

<p>twoinanddone, I think we are on the same page. Using your example, I would need to have my dd declare 6000 (4000 for AOC and 2000 because grants exceed QEE by 2000) as taxable income. Then 1) I can withdraw 10000 from the 529 plan to cover room and board and 2) claim 4000 for the AOC. Correct? </p>

<p>Thanks to everyone for taking the time to write a detail explanation. </p>

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<p>Be aware that taxable scholarships and grants are now considered unearned income for the purpose of the kiddie tax and could be partially taxed at the parent rate if higher.</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/i8615.pdf”>http://www.irs.gov/pub/irs-pdf/i8615.pdf&lt;/a&gt;&lt;/p&gt;

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<p>No. You have to actually PAY $4000 of non tax benefited money (not 529 money) in order to claim the AOTC. In your example you haven’t paid $4000, you’ve used 529 money. You can’t double dip.</p>

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<p>twoinanddone: I was only using the 529 plan to pay room and board. My daughter would declare an additional 4000 of her scholarship as taxable income (in addition to the required 2000 taxable amount) so I could claim the AOC.</p>

<p>Annoyingdad: Once again you have point out something I need to check. Sad to say, right now my daughter tax rate is higher than my tax rate since I am unemployed. Is the kiddie tax still an issue? I will read the link you provided. I did run some sample tax returns and realize that it makes no sense (in my case) to take the full AOC due to the tax liability it causes my daughter.</p>

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<p>But I don’t see where you are actually paying $4000 out of cash. If you ‘move’ 4000 of scholarship money, but then pay that QEE from 529 money, you can’t take the AOTC because you’ve already received a tax benefit from the 529 account. If you move the scholarship money, you’d have to ‘pay’ the tuition money. If you ‘pay’ the tuition money with 529 money (swapped it from the room and board), you get no tax credit.</p>

<p>Look at it this way. If your daughter’s entire QEE was covered by scholarships, you’d get no AOTC because you didn’t pay anything. You’d use your 529 to pay her room and board, so no taxable costs to her or you. If she had no scholarships and you used 529 to pay it all, QEE and R&B, you’d get no AOTC because it’s all paid with 529 money. If she had 100% scholarships, she’d have to declare all R&B as taxable scholarship. </p>

<p>To get the AOTC you actually have to with pay some QEE with non-benefited money. </p>

14

<p>You are correct that the full QEE (tution, fees, books) for the AOC is covered by her scholarships. However according to the IRS, I am allowed to declare part of the scholarship that was used to pay for the QEE as taxable. This removes the tax advantage that the scholarship has and allows me to pay those QEE with non tax advantage dollars. Then, the QEE qualifies for AOC as long as the same QEE are not used for any other educational benefit such as for 529 deductions.</p>

<p>I believe this is what you said in post #8. You just explained it better.</p>

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<p>I still don’t see it. You said you are going to withdraw $10,000 from the 529. Where is the AOTC credit money? To get the AOTC, you have to pay some QEE with ‘fresh’ money, not money from the 529. If you don’t pay any money to the school that hasn’t been drawn from the 529 money, you can’t take the AOTC.</p>

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<p>twoinanddone’s example:</p>

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<p>The example has total expenses of $30,000, with $22,000 in grant/scholarship money, leaving $8,000 to be paid. Why would you withdraw $10,000 from the 529 to pay a bill of $8,000? If you want to take advantage of the full AOTC, you would only use $4,000 from the 529 and pay the remaining $4,000 with other (non-tax advantaged) funds, making sure to declare $6,000 of the grant scholarship money as taxable. This would be the final result:</p>

<p>Tuition/books/fees (AOTC and 529 QEE)</p>

<p>$20,000
$16,000 grants/scholarships (non-taxable)
$4,000 non-529 parent/student money (qualifies for full AOTC)</p>

<p>Room & Board (529 QEE)</p>

<p>$10,000
$6,000 grants/scholarships (taxable)
$4,000 529 funds</p>

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<p>If your daughter’s tax rate is the same or higher than yours, I’m not sure if there will be any negative implications of the kiddie tax, if it even applies. Also, realize that the AOTC is partially refundable, meaning that even if you have $0 tax liability, you can receive some benefit from it. Make sure that you don’t completely disregard it.</p>

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<p>And since the second $2000 of the AOTC is only a 25% credit to taxes owed, it may not be to your benefit to ‘move’ that money and pay the tax on the scholarship.</p>

<p>I’m in exactly this position, that I need to decide if it worth it to ‘move’ the entire $4000 to the ‘room and board’ side of the balance sheet or only $2000 (I paid about $4k to the school last fall). I need to figure out if the $500 credit for that second $2000 is worth it, seeing that she’ll have to pay the kiddie tax and possibly ‘real’ tax on it.</p>

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<p>twoinanddone: You are right. In my case, every dollar that I have my daughter declare taxable (so I can get the AOC) after the first $2000 yields a $.10 refund for me but increases my daughter’s taxes by $.16. </p>

<p>As for your example:</p>

<p>Tuition/books/fees (AOTC and 529 QEE)</p>

<p>$20,000</p>

<p>$16,000 paid with grants/scholarships (non-taxable)
$ 4,000 paid from my savings, non-529 parent/student money (qualifies for full AOTC)
$ 6,000 of the $22,000 scholarships declared taxable on my daughter’s return</p>

<p>Room & Board (529 QEE)</p>

<p>$10,000 paid from 529.</p>

<p>I am basing this on comments (see below) posted on the article reference in post 3 from the Savingforcollege.com site. The reply from Savingforcollege.com indicates that the taxable portion of the scholarship does not have to apply to room and board for the purposes of determining the amount allow for QEE for the 529 plan.</p>

<p>This is the quote I am basing this on:</p>

<p>"Carol Reninger Johannes</p>

<p>Institution billed R&B of 11,440 which isn’t qualified for AOC nor keeping the scholarship non-taxable (which is why QE are only 7908), but will qualify for 529 reimbursement. My question is whether the taxable portion of the scholarship MUST reduce the amount of R&B, or can it just be considered as income since we’ll be paying tax on it.</p>

<p>Reply · · Edited · December 15 at 4:51am</p>

<p>Savingforcollege.com</p>

<p>Carol Reninger Johannes OK I see now. Disregard the taxable scholarship income in computing your 529-eligible expenses. Room and board does not have to be reduced for this."</p>

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<p>^^^
If the $20,000 bill for tuition/fees/books is being paid for with $16,000 in scholarships/grants and $4,000 from your non-529 savings, and the $10,000 bill for room and board is being paid for entirely with 529 funds, where is the other $6,000 in scholarships/grants going?</p>