In the second link it is very clear that the student MUST provide >50% of their support.
We have had a number of threads on this topic before.
Unless they have a stunningly well paid internship or a coop, then it is definitely better to wait until after your kid has graduated to make the withdrawal, preferably in their first year of work if thatâs enough to get to 50% of living expenses (which is usually the case with a decent job starting the summer after graduation) since their tax rate will be lower.
If they go back for a graduate degree and have a taxable stipend as an RA plus a tuition waiver then thatâs the ideal time to take money out, since in most cases the stipend is earned income and the tuition waiver is a scholarship.
Whatâs debatable is whether you pay the 10% penalty for non-qualified withdrawals after graduation or if you can count the scholarships received in prior tax years. Interpretations differ here since there is no specific IRS ruling one way or another. Even so this can still be at a lower overall tax rate than that applicable under the kiddie tax rules.
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I believe if they are over 24, this doesnât applyâŠ.
If they are over 24 then kiddie tax doesnât apply so they donât need to worry about having sufficient earned income. But it is still advantageous that the tuition waiver counts as a scholarship and allows withdrawals without penalty.
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I always like to play around with new situations in Turbotax. I typically would use the previous yearâs version of Turbotax to get a feel for how things will work in the current year. Looking at the forms view in Turbotax also helps understand what is going on. Rules change, even from year to year, so your choices are to figure out how to stay on top of things yourself or hire a professional. I donât use an accountant, but I would hope some planning type questions would be allowed. Having said that, DIY comes with risks. I just realized I made a mistake on my state taxes for the past 20 years. It wasnât a huge a mistake, but I estimate that it cost me about $1,200 total. I view that as the cost for doing it myself.
There will be zero tax reporting if a 529 distribution is valid, i.e. used for qualified education expenses, and it doesnât matter if the distribution is made to the student or the account owner, or who makes the purchase. So, I donât understand the âvery messy tax formsâ comment.
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Then do t worry about it if it doesnât apply to you. It was all allowable and untaxed but the accounting for it was messy. Would be cleaner if she had purchased the laptop herself. Thatâs all.
Itâs not about me; itâs about everyone who uses 529 distributions for qualified education expenses, and that includes you and your daughter. No tax reporting is required, messy or otherwise.
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you have to show that any distribution goes towards qualified expenses. So yes there is reporting required, though no tax burden associated with the disbursement.
Wrong. There is no tax form requirement that a taxpayer must show that a 529 distribution goes toward qualifying expenses. If you dispute that, please tell me where a taxpayer documents on a federal tax form the use of a 529 distribution for qualifying expenses.
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For your own records if audited. Not on the forms. We use TurboTax. Not sure what a CPA might advise or require. Iâll never understand why a few on CC prefer to just pedantically debate and thing and everything instead of contributing positively to the conversation.
That IS a positive comment. You donât have any tax form liability regardless of who made this purchase.
TurboTax wonât careâŠjust keep records yourself of these qualified purchases. I believe thatâs all you need to do.
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Thatâs not what we had to do. It worked out. It wasnât as easy as it should have been though. That was our experience this year with our taxes. This post was intended to be helpful to others. No wonder no one bothers to post helpful information on this topic.
Donât make this more complicated than it needs to be. My first comment here was in response to your remark that if the parent pays for a 529 qualified education expense, âit makes for some very messy tax forms.â This is not true (as there is nothing to report on a tax form when a 529 distribution is used for qualified expenses, regardless of who pays for the expense), and it is potentially misleading for those who do not know any better. My intention was not and is not to argue with you; it was to provide a correction for the benefit of the CC community (you know, to make a positive contribution to the conversation).
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Your overall concern from the beginning of the thread was the negative effect your daughter experienced with the kiddie tax (how some unearned income for certain taxpayers is taxed at the parentâs highest marginal rate). The kiddie tax is not a secret, and there have been quite a few CC threads discussing this or mentioning it over the past several years.
Any financial information posted in this forum that concerns funding an education is helpful, but in order to be helpful it needs to be accurate. Having had personal experience with using 529 accounts and the tax implications, when I see incorrect information posted here, I will often chime in with a correction. Some posters are grateful when inaccurate information they have posted is corrected, others have different reactions.
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I do understand that the kiddie tax issue was one that you didnât anticipate. As someone else upstream posted, this has been addressed before. But yes, it can be quite the shocker when a student needs to pay at the parent rate per kiddie tax guidelines.
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Is there any way to fix the Kiddie Tax problem? Would switching the 529 to the childâs ownership change the tax situation so that the student could pay the tax as an independent taxpayer (while still a student?
Is the only solution waiting until the student graduates and is outside the kiddie tax rules?
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Regarding the kiddie tax, the issue is not the ownership of the 529 account; itâs who receives a non-qualified 529 distribution. If a student subject to the kiddie tax has over $2,200 in unearned income, the kiddie tax will kick in. It doesnât matter if any of that unearned income came from the taxed earnings portion of a non-qualified 529 distribution from a 529 account owned by someone else.
To avoid the kiddie tax, the student can either age out (older than 23); have earned income that is more than half the studentâs support; not have any living parents; file a joint tax return; or not have income that triggers the kiddie tax (either not have enough income to require the filing of a tax return, or not have more than $2,200 in unearned income, as defined for the kiddie tax).
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So Turbotax does ask lots of questions about 529 withdrawals and stuff like education credits. To be fair, I imagine many users of tax software have no idea how that information flows. In the case of 529 qualified distributions made to the parent, I can certainly understand why someone gets 1099Qs/1098Ts and probably thinks it is entered on their taxes somewhere. Even if it is clear that it is not entered on your taxes, going through the Turbotax Q and A to determine if a distribution is qualified can be a hassle. Sure, some people know for sure beforehand and some probably figure it out before tax time. But if you want to confirm your numbers using the software, it is more than trivial.
As far as BelknapPoint being one of those posters who just doesnât get it, I have found BelknapPoint to be one of the most knowledgeable posters I have ever seen. His clarity and accuracy are beyond reproach. Although I only post here from time to time, I say thank you to BelknapPoint for his contributions.
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I entered the 1098T in each kids tax account because their name is on it. is that wrong?