Kiddo #2’s school billed Spring 2020 in December 2019. I paid in full and then withdrew the corresponding amount from the 529. Due to campus closure as a result of the pandemic, they are issuing a refund of 50% of the semester’s room and board and I’m wondering if this will have any effect on taxes.
The refund will appear on the bursar’s account. I believe this will automatically transfer to the student’s bank account at the end of the semester if there aren’t any additional fees incurred. If I ask that the amount be kept in the account and apply it to Fall 2020 QEEs, do you think I can just ignore it as far as taxes go?
Don’t have the money back yet. I’m thinking this could impact 2020 taxes and am wondering if there is anything I can do to minimize or negate a potential impact.
My kid’s college is letting it sit in the account as a credit toward next year’s charges (with an option to receive payment instead, for those who prefer).
As the 2020 1098-T will report Payments Received in field 1, we decided to have the amount reimbursed, put it in the 529 plan and will pay it from there in July for the tax year 2020. Not sure whether or not it will make any difference in the end, yet better safe than sorry.
But if you do this be cautious that you plan knows it is a refund being recontributed not a new contribution. Otherwise the 1099-Q that you receive from your 529 plan for 2020 will be screwed up as it will show both withdrawals.
The simple option is to keep it in your bank account until the fall, assuming that the refund doesn’t exceed the remaining qualified expenses you will pay before the end of 2020 and just track your net expenses and withdrawals.
If you take a refund of qualified expenses that were paid with 529 money and deposit it in your checking account, there could be tax issues, because the amount refunded may be considered a non-qualified distribution, depending on the timing of the original distribution and whether or not there will be any more 529 qualified expenses paid later this year.
Recontributing the refunded 529 dollars to a 529 account with the same beneficiary is explicitly allowed by the IRS, as long as it is done within 60 days of the refund date. For many people, this may be the easiest way to avoid any tax issues or questions from the IRS. Just keep good records so you can show what happened.
My experience with this exact situation, more than once, is that the plan administrator makes no distinction between new contributions and recontributions of 529 money that has been refunded by the school. To the plan administrator, a contribution is a contribution is a contribution. This is why, as noted above, it’s important to keep good records detailing the original distribution for 529 qualified expenses, the school’s refund of part or all of this distribution, the recontribution of the refunded amount in a timely manner, and any subsequent distribution from the 529 account for qualified expenses.
@Twoin18 Thank you for your message, appreciated! The original Room & Board for the Spring 2020 was included as Gross distribution on our 2019 1099-Q. Presumably, counting the reimbursed amount as 2020 contribution and the Fall 2020 Semester payment as incremental 2020 1099-Q Gross distribution should not have negative tax implications, as those transactions will fall into separate tax years and 1099/Q’s, as long as those payments will be reported in the 2020 1098-T by the university, as it should be.
If the refund is just for housing then the amount on the 1098-T won’t be affected but your 1099-Q for 2020 will show total withdrawals that are higher than your actual expenses. It may make your life more difficult when completing your tax return if that pulls in data from the 1099-Q automatically.
Interestingly if the refund is counted as a new after tax contribution then it will raise the effective tax basis of your account (ie a lower percentage of future distributions will be earnings). That is modestly beneficial if money is eventually left over and is taken as a taxable withdrawal.
As an example, say you had $50K in there which was half contributions and half earnings and had withdrawn $10K for this semester. If you put back $5K then you will now have $25K contributions and $20K of earnings and future withdrawals will be 55.6% from contributions and 44.4% from earnings. Any money left over will be in this proportion also. Whereas if you’d kept the original amount in your checking account the 529 balance would still be 50% earnings.
This occurred to me as well the first time I was involved with recontributing a refund of 529 money. It’s just another one of those 529 things that hasn’t been taken into account in either the IRC or IRS regulations.
Within 60 days of receiving the refund, I deposit the refund into the 529, making note on my own spreadsheet that it is a re-deposit of the refund.
In the fall, I pay the QEEs and withdraw from 529 (like I normally would)
Then in 2021, I do my taxes (as I normally would).
Only thing that changes is that I’ve had to do some extra accounting on my end of where the refund came from and that it was deposited back into the 529.
I was planning on taking the refund which is being deposited directly into our checking account and paying our daughter’s federal school loan with it. It won’t pay off the entire amount but it will take a large chuck of it away and that is at 0% right now. I read that you can’t pay interest with it but I think you can pay up to $10,000 of it with 529 money. This money was originally from her 529. She owes about 5K and her reimbursement will be about 3.5K.
Right… no double dipping with educational tax advantages. 529 money can be used to pay up to $10,000 of student loan debt for any one person, with no distinction between paying off principal or interest.
So is the procedure described in post #11 the recommended way to deal with a refund? That’s better than depositing refund into parental checking and paying whatever college bill comes next with it?
OR (if this is an option), leaving the refunds as credits at the school (I don’t know if this is possible…neither of my kids’ colleges have communicated their refund info yet). Thanks!
I won’t pretend to know the rules, but that’s what we did. We paid in December 2019 for the full 2020 spring semester and were reimbursed by the 529 shortly thereafter. In late March/early April, the credit was added to the student billing account and will be applied against the fall 2020 billing due in August.