This might not be the best forum, but since it has to do with a 529, I’ll try it here.
D, in her final semester, just changed from a full student to a part time student.
Her final semester tuition was paid via Private College 529. The final payment was made in tax year 2019. The refund will occur in tax year 2020.
What are the tax implications of this refund?
Our income is high enough to preclude any tax implications associated with funding the 529. (We didn’t get any deductions when this 529 was funded).
Any tips?
We do not want to fund another 529; we would rather pay penalties and move forward.
A refund of expenses that were deemed to have been originally paid using 529 funds can be recontributed to the 529 account within 60 days of receipt of the refund, without any tax or penalty consequences.
If you don’t want to put money back in the 529 account, don’t recontribute the refund and simply pay the tax on the earnings portion of the refund at normal income tax rates, plus the 10% additional tax penalty if none of the penalty exceptions apply.
But if the refund is made to you and your D’s tax rate is lower, you might want to put it back in the 529 and then distribute to her, so the tax would be payable at her tax rate not yours (assuming she is no longer subject to kiddie tax in 2020).
@BelknapPoint and @Twoin18 Thank you for your insights.