I have been searching for the answer to this for about an hour and can’t find it! My son is looking at a National Merit Scholarship (University of Alabama) where he would receive a $3500/year stipend. If he decides to do engineering, he’d get an additional $2500/year stipend. These are both from the University. So if I want to use the 529 funds for room/board (or other QEE), does the stipend reduce that, or can I pull the 529 funds first for the full amount and then use the stipend for things that don’t qualify for 529 expenses such as travel or other spending money (football tickets, etc.)?
For example, the room and board might cost $8000. Can I use $8000 from the 529 plan to pay for that, or do I have to use the stipend on that first and then pay what is left over ($4500 or $2000, depending on engineering or not) with the 529 money?
Hope this makes sense! I wasn’t sure if I should ask this question here or in the Alabama forum. I figured this is probably a situation that people see at many universities and that I should post it here.
The school will apply the scholarships and stipends to the billed amounts first, and you will receive a refund for any amounts over the stipends. The amounts you pull from your 529 and what you use them for are up to you, and how you use them will determine if any amount is taxable.
If you use 529 money for non qualifying expenses, you’ll have to pay taxes on the earnings. If you use scholarship money for anything other than qualified educational expenses (travel and football tickets aren’t QEE) your child will pay taxes on that amount.
Room and board are indeed qualified expenses - per IRS
(not sure if links work here but search irs site for 529 plans - its explicitly mentioned in FAQ that room and board are qualified expenses)
Thank you @twoinanddone. Yes, I do understand about what the 529 pays for and that sort of thing. What I’m unsure of is how it works with the stipend. So it sounds like the stipend will take down the amount I can use with the 529 plan? So, for example. If room and board costs $8,000, then the university will apply the $3,500 to it, and I can only use the 529 funds for the remaining $4,500 (without being taxed, I mean)?
I guess it is confusing because I don’t believe there are any rules as to how I use that stipend, so in the grand scheme of things we could assume we’re using it for travel or some other item that will cost us money for student that isn’t a QEE (even though the university is directly applying stipend to student’s account). And save the 529 funds for the room and board (even though university will have taken care of part of that with the stipend).
Sort of switching around how expenses are paid for. It would be clearer if the university just gave us a check for the stipend. Because I assume if your stipend is over the amount of expenses with university, they issue you a check? Which makes it seem that you can use it however you want to…right?
I’m just not sure how submitting expense receipts goes for the 529 plan. It seems like my expense for room/board is only going to show $4,500 since the $3,500 stipend will have been applied there.
I hope I’m making sense, and I don’t mean to sound difficult. I so appreciate any help! Would it be better to post in the Alabama forum? Do different universities handle the way stipends are paid differently?
And maybe in the end it doesn’t really matter since we’ll have to pay taxes on the non-QEE items anyway? Main reason for asking is that grandparents are planning on helping, and won’t want to pay taxes since they have set up a 529 plan for him. So if any QEE expenses are reduced by stipend, that might be less money they are able to contribute without paying taxes.
This can be confusing because there are different definitions of QEE depending on what tax program you are talking about. Room and board is QEE (for half-time or more students) for 529 payments, but room and board is not QEE for anything else: tax credits, determining tax status of grants and scholarships, tuition and fees deduction.
There is no requirement to submit receipts when paying expenses with 529 funds. You figure out how you want to allocate the dollars from your different funding sources, and then you or the student pays any required income taxes according to the IRS rules. One of the key things to remember here is that if 529 money is used for non-QEE, only the earnings portion of the 529 distribution will be taxable. If grants and scholarships are used for non-QEE, the full amount is taxable.
Thank you @BelknapPoint. But even if I don’t “submit” expenses, and the university uses the stipend to reduce the amount of our bill to them for QEE…am I allowed to consider using the 529 to pay the entire amount of the bill without paying taxes on that?
I think I should have explained this differently from the get-go. I’m trying to figure out how much my parents will be able to pay from their 529 account without being taxed. Assuming Room/Board is $8,000, but we are given a $3,500 stipend from the university which they then apply to our bill so it now shows we only owe $4,500 - how much can my parents pay from their 529 account without being taxed? $8,000 or $4,500? I realize that if they are able to pay the $8,000 with 529 funds that that means we will be paying taxes on the stipend that will essentially be used for other non-QEE such as travel, etc.
First of all, if your parents make a 529 distribution payable to your son or to the school, and the payment is used for non-QEE and it is therefore taxable, it will be your son who is responsible for the tax, not your parents.
If the school automatically applies a $3,500 stipend to a room and board bill of $8,000, an additional non-taxable 529 payment of $4,500 can be used to pay the balance. Note that the $3,500 stipend in this case will be taxable income to your son, because it is being used for a non-qualified expense under the grants and scholarships definition of QEE.
If you want to use more 529 money for the $8,000 room and board bill and not pay tax on the 529 distribution, you potentially have options. You could make a 529 payment of $8,000, even though the amount due is only $4,500 because of the $3,500 stipend that has already been applied. The school would probably give you a refund in the amount of $3,500 because of the overpayment. You can then deem this to be a refund of the stipend, and your son can use it for whatever he wants. HOWEVER: if this refund is used for non-QEE (football tickets, airfare, dorm furnishings, etc.), the full amount will be taxable income to your son.
@BelknapPoint thank you. Very helpful. That makes sense.
Also, I need to re-read the definition of QEE for scholarships/grants - I thought it DID cover room/board (cost as determined by university). Thanks again for the heads-up. Much appreciated.
Chapter 1 discusses scholarships and grants. On page 5, you will see that room and board is specifically listed as a non-qualifying expense when determining the tax status of scholarships and grants.
Not the whole amount of taxable scholarship income will be subject to tax. There would be a standard of around $6,000 deduction that would reduce it, if the student has no ostudent’s income.
For example if the NMF scholarship covers tuition, fees (nontaxable scholarship), then the extra stipends of $3,500 and $2,500 can be used toward travel and other expenses, and could be included in student’s taxable income. So if they total $6,000 and might be reduced by book expenses as well, then no tax might be actually due. The standard deduction was $6,300 for a dependent student.
What expenses can I use the money for?
Money withdrawn from the 529 plan account can be used for a wide range of
qualified higher education expenses, such as room and board, tuition,
books, and computer equipment. Refer to your enrollment kit for a full list of
expenses covered by your state's plan.
As per my post #6 in this thread, qualified education expenses are defined differently depending on which tax program is at issue. Here’s another quote from IRS pub 970:
Qualified education expenses. These are expenses related to enrollment or attendance at an Eligible educational institution (defined later).
…
Expenses for room and board must be incurred by students who are enrolled at least half-time.
Room and board is a qualified education expense for 529 payments for a student whose status is at least half-time. Room and board is not a qualified education expense for any other purpose. Read chapter 8 of the 970 pub.
Thanks. My mistake for not reading all 95 pages! I now see that you have to be at least a 1/2 time student to deduct room and board, and that for students living off campus you can only deduct up to the normal cost of living on-campus. This has been very helpful.
Using the word “deduct” males me think that you might be talking about the tuition and fees deduction for education expenses. Room and board is not a qualified expense for the tuition and fees deduction.