New IRS guidance on 529 plan recontributions, rollovers and qualified expenses
Prior to the 2018 tax year, 529 plans were geared toward post-secondary educational institutions, including colleges, universities and technical schools. But beginning with tax year 2018, the Tax Cuts and Jobs Act widened the net of qualifying schools to include eligible kindergarten through grade 12 institutions, whether public, private or religious. For these schools, you can spend up to $10,000 from your 529 plan to cover qualified tuition expenses. The earnings on nonqualified distributions are subject to income tax as well as the same 10% penalty that applies to nonqualified distributions from ESAs (Sec. 529(c)(6)). This penalty is paid to the IRS with the taxpayer’s return for the year of the nonqualified distribution.
- The tax penalty will then be 10% of this amount, or just 1% to 3% of the distribution amount.
- In that case, the payment amount must also be subtracted from the total qualified expenses.
- The earnings portion of a distribution is assumed to be proportional to the total earnings in the 529 plan.
- The total dollar amount entered from each portfolio should equal the total amount of the distribution.
This path also provides flexibility when paying smaller bills like those for books or off-campus room and board. Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need. A Form 1040 return with limited credits is one that’s filed using IRS Form 1040 only (with the exception of the specific covered situations described below). The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Reporting 529 Nonqualified Distributions
She also offers one-on-one financial coaching sessions at ConsciousCoins.com. Paper receipts can lose their saturation over time, so scanning and capturing them before they degrade in quality is important. Remember, the burden is on you to prove that you spent the money on qualified expenses. If you’re how to report 529 distributions on tax return concerned about timing your withdrawals, you can wait until the bill is due and make a payment from your checking account or credit card, and then reimburse yourself from the 529 plan. This strategy ensures you don’t miscalculate the timing of the withdrawal or withdraw more than you actually need.
Save and invest for college
The earnings portion of a non-qualified withdrawal is subject to income tax and a 10% penalty. A 1099-Q form should be filed and sent to taxpayers by officers or employees who have control of a program established by a state or qualified educational institution or anyone who has made a distribution from a 529 plan. Distributions from a 529 plan are considered to be qualified when they are used to pay the qualified educational expenses of the beneficiary. However, if you take a non-qualified distribution from a 529 plan, that money can be invested in an annuity, if you wish.
How to report a taxable 529 plan distribution on federal income tax returns
She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients. Please consider your objectives and tax implications before investing with Raise Financial, LLC. Let’s be honest, filing taxes is a chore, no matter how you look at it. But if you know the rules and do a little prep work, it doesn’t need to be stressful. Thus, the timing of the distribution must match the timing of the payment. (If entering in Deductions and Credits, the ESA and 529 qualified tuitions interview is found under Education).
In addition, an eligible educational institution may establish or maintain a program that permits a person to prepay a designated beneficiary’s QHEEs. Code Sec. 529(c)(3) provides that distributions (including any attributable earnings) from a 529 plan are not included in gross income if such distributions do not exceed the designated beneficiary’s QHEEs. Similar exceptions to the 10% tax penalty apply when the beneficiary receives a tax-free scholarship, veterans’ educational assistance, employer-paid educational assistance, and other tax-free educational assistance (other than gifts or inheritances). As with the AOTC and LLTC, the tax penalty is waived only to the extent of the qualified expenses that justified the tax-free educational assistance.
Are Contributions to a 529 Plan Tax Deductible?
Now college is closer and it’s time to think about spending the money you’ve put aside. You’ll be in control of how much is withdrawn and how it’ll be used, but there are a few things you need to know up front to make the most of your savings. Under IRS 529 withdrawal rules, qualified room and board expenses for students living off campus can’t exceed the university’s official cost of attendance. Requesting payment directly to your college can be a simpler way to handle your 529 distributions, but always check the school’s policy around funds received directly from a 529 plan first. They should treat the 529 plan money as a payment of the college’s bill. If the 529 plan account owner is taking a partial withdrawal, they will have the option to select a portfolio or portfolios to withdraw from.
You would not want the college to view the 529 money the same way it views a scholarship and reduces your child’s financial-aid package. In this case, you should request the distribution be made payable to you or your child, and then use it to pay the college. When withdrawing from your 529 plan, it’s usually a good idea to lock in your tax benefit by taking the maximum amount from your accounts that will qualify for tax-free treatment. Even if you’d prefer to withdraw less than the maximum amount this year so you can spread the money over the college years, it may still be worth withdrawing the maximum. This way you end up with a higher tax basis in the account and even additional state tax deductions. Towards year-end, 529 account owners should sit down and figure out exactly how much was spent on qualified expenses during the year and make the appropriate “catch-up” distribution from the 529 plan.
Are 529 earnings taxable?
Second, the distribution, when added to all other contributions made to the ABLE account for the tax year that are subject to the limitation under Code Sec. 529A(b)(2)(B)(i), must not exceed that limitation. Scholarships are considered tax-free educational assistance but it’s a myth that any scholarship impacts your 529 plan withdrawals. As long as your withdrawals are used to pay for qualified education expenses.
Then you have the job of finding and adding up all the receipts for the off-campus student. Picture the situation of a typical college student living with five others in the apartment. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax.
If you use a 529 plan and pay state income tax, you may be eligible for an additional benefit. Currently, over 30 states including the District of Columbia offer a full or partial tax credit or deduction on 529 plan contributions. If you made non-qualified purchases last year, you will need to review your 1099-Q, which breaks out the basis portion and the earning portion. The earnings portion of a non-qualified withdrawal will be subject to income tax and a 10% penalty. The basis portion will never be taxed or subject to penalty because it is made up with the amount you originally contributed with after-tax dollars.
However, the 10% penalty is waived when the non-qualified distribution occurs due to the tax credit adjustment up to the amount of the qualified expenses that justified the tax credit. 529 plan distributions used to pay for non-qualified expenses are subject to income https://turbo-tax.org/ tax and a 10% penalty on the earnings portion of the withdrawal. This includes 529 distributions for airfare and other travel costs, college application or testing fees, health insurance, or room and board costs beyond the college’s cost of attendance (COA) allowance.
Although using a 529 plan to repay student loans is considered a qualified expense by the federal government, some states consider student loans to be a non-qualified expense. This could lead to state income tax but not federal income tax on the earnings portion of the student loan payment. No matter how much you withdraw, you have to use the money for qualified educational expenses to avoid paying income tax and a 10% penalty. There is no annual limit on how much you can withdraw for college expenses, but there are limits on certain expenses. An annual withdrawal limit of $10,000 is applied to 529 plans for K-12 tuition expenses.
As part of this process, determine if the AOTC is maximized by paying second-semester college bills in December versus January. They have enough in tuition, fees, books, supplies, equipment and computer technology to cover the 529 plan distributions, even after making the education tax credit adjustment described above. In some cases, your 1099-Q may include the fair market value of the account. Boxes 4 through 6 provide additional information, but they have no impact on whether some of your distributions are reportable on a tax return. Box 1 of your 1099-Q will report the total distribution from your education program for the year, regardless of whether the funds are sent directly to the school. Box 2 reports the portion of the distribution that represents account earnings, while Box 3 reports the portion representing the original contribution to the account.
