Now your possible issue for 2019, is that since those withdrawn 529 funds you got in 2018 are considered "pocket money" in 2019, if congress does not renew the deductibility of qualified "out of pocket" expenses, then you're just plain outta luck.
Full Answer
529 plans are typically the best vehicle to save for college. Thanks to the 2018 Tax Cuts and Jobs Act, you can now also reimburse yourself up to $10,000 for elementary or secondary school tuition.
529 plans do not have withdrawal deadlines. A 529 plan account owner is not required to take a distribution when the beneficiary reaches a certain age or within a specified number of years after high school graduation, and funds can remain in the 529 plan account indefinitely.
The earnings portion of a taxable 529 plan distribution must be reported on the beneficiary's or the 529 plan account owner's tax returns.
5 tips for a tax-free 529 plan withdrawalCalculate your qualified expenses. ... Decide which account to use. ... Match your 529 plan withdrawal to qualified education expenses. ... Make the distribution payable to the beneficiary. ... Evaluate any leftover funds.
You don't need to provide the 529 plan with evidence that you will be using the money for eligible expenses, but you do need to keep the receipts, canceled checks and other paperwork in your tax records (see When to Toss Tax Records for more information), in case the IRS later asks for evidence that the money was used ...
If you truly have no other use for your leftover 529 plan savings, you can always take a non-qualified distribution. Your contributions will never be taxed or penalized, since they were made with after-tax dollars. Any earnings on your investments, however, will be subject to income tax and a 10% penalty.
The IRS calls 529 plans “qualified tuition programs.” But, in fact, the funds can be used for other school-related expenses. Spending in these eight categories are OK as long as you can show the IRS the appropriate documentation in case you are audited.
The 1099-Q gets reported on the recipient's return. ** The recipient's name & SS# will be on the 1099-Q. Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.
Form 1099-Q may be issued to the designated beneficiary or the account holder of a 529 plan account. If a distribution is made directly to a beneficiary or to an educational institution for the benefit of a beneficiary, Form 1099-Q will be issued in the name of the beneficiary.
If the check is made out to you as the account owner, the 1099-Q comes to you. Either way, the IRS gets a copy. So, the Feds know that a withdrawal was taken and that there may be tax consequences. When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable.
Student- and parent-owned 529 plans are reported as assets on the Free Application for Federal Student Aid (FAFSA), but distributions from these 529 plans are ignored.
Up to $10,000 annually per student, in aggregate from all 529 plans, can be withdrawn free from federal tax if used for tuition expenses at a public, private or religious elementary, middle, or high school.
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, boo...
Money from a 529 account must be used for qualified education expenses to avoid taxes and penalties. But in addition to college expenses, you can a...
When you have qualified expenses, you can take withdrawals federal income tax- and penalty-free. To avoid a tax bill, your qualified withdrawals mu...
529 assets may have a relatively small effect on federal financial aid eligibility because they are considered assets of the parent in the Expected...
Parents can withdraw 529 plan funds by completing a withdrawal request form online. Some plans also allow 529 plan account owners to download a withdrawal request form to be mailed in or make a withdrawal request by telephone.
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. The total dollar amount entered from each portfolio should equal the total amount of the distribution, as shown in the image below:
However, a new FAFSA form, which is scheduled to go live on October 1, 2022 , eliminates the grandparent financial aid trap. The updated FAFSA will not require students to report cash report, including money from grandparents. So, any distributions that a grandparent takes from a 529 plan in 2021 or later (due to prior-prior reporting) will not be included in the student’s financial aid calculations on the FAFSA. But, grandparent support is still considered on the CSS Profile form.
College expenses , including tuition, fees, books, supplies and equipment, computers and room and board if the student is enrolled on at least a half-time basis
You can withdraw 529 plan sav ings tax-free to pay for qualified education expenses, which include costs required for the enrollment and attendance at in-state, out-of-state, public and private colleges, universities or other eligible post-secondary educational institution. Qualified 529 plan expenses also include up to $10,000 per year in K-12 tuition expenses. However, if you don’t follow important 529 plan withdrawal rules, you may be subject to taxes and a penalty.
529 plan funds can also be rolled into another account with the same beneficiary, or into a sibling’s 529 plan account.
In this example, if the 529 plan account owner withdraws more than $4,000 the excess distribution will be considered non-qualified. The earnings portion of the non-qualified distribution is taxable, however, the 10% penalty may be waived on a non-qualified distribution up to $2,000 (the amount of the beneficiary’s scholarship) . Other exceptions to the 10% penalty include:
But in addition to college expenses, you can also spend up to $10,000 per year on tuition expenses for elementary, middle, and high school—private, public, or religious. It's important to know that the $10,000 annual limit is per beneficiary, not per account—the money can come from multiple 529 accounts. Any amount over that $10,000 limit will be subject to income tax and a 10% federal penalty tax.
Additionally, the SECURE Act of 2019 expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs.
Conversely, accounts that are considered assets of the child, such as an UGMA/UTMA account, tend to have a greater effect on federal financial aid eligibility in the EFC calculation.
When you have qualified expenses, you can take withdrawals federal income tax- and penalty-free. To avoid a tax bill, your qualified withdrawals must be in the same calendar year as the expense. For instance, if you buy textbooks in September 2020, and plan to take a withdrawal from the account to reimburse yourself—the withdrawal must be done in ...
You can withdraw money for nonqualified expenses too at any time, but you will owe federal income tax and the 10% penalty, in addition to any state or local income taxes and investment taxes on any earnings withdrawn.
And though the amount of money flowing into 529 plans is at record levels— $328 billion (PDF) in 2018, according to the College Savings Plan Network—there’s still a lack of understanding about how the accounts work. One-third of Americans don’t even know that a 529 plan is a way to save for college, according to a May 2019 survey by financial ...
The American Opportunity Tax Credit gives you a $2,500 tax credit when you spend $4,000 on qualified college costs. But if you pay for those costs with money from a 529 account, you don’t get the tax credit.
Withdraw Funds Only for Qualified Expenses. You can use funds from a 529 account for a wide range of education-related expenses. That includes tuition, fees, books, supplies, and computers. The money can also go toward expenses for room and board, as long as the student is enrolled in school at least half-time.
If you’re unsure whether an expense qualifies, check with your plan provider. Keep in mind that you have to spend the money you take out of a 529 account in the same calendar year (not school year) as the withdrawal and that you should keep your receipts.
But not all college-related bills are valid for 529 funds.
If you have children heading to college this fall and plan to tap 529 funds to pay expenses, it’s important to withdraw the money correctly. If you’re not careful, you could get hit with a 10 percent penalty, plus you’ll have to pay interest on the earnings for any funds that you use for the wrong kinds of expenses.
One-third of Americans don’t even know that a 529 plan is a way to save for college, according to a May 2019 survey by financial services firm Edward Jones. And even among those who do, almost half didn’t know about possible tax benefits and other features of 529 accounts. If you have children heading to college this fall ...
The rules for K-12 students are different, however, and cap the maximum at $10,000 a year. 4
529 Withdrawal Penalty. If you take a distribution from your child’s 529 plan and use some or all of it to cover nonqualified expenses, you will owe not just taxes but, in most cases, an additional 10% penalty on the taxable portion of those earnings. (Keep in mind that the plan administrator will apportion the distribution to include mostly ...
She points to IRS Publication 970, page 60, which says, "To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses." 1
A 529 savings plan, or qualified tuition program (QTP), as it is officially known, provides tax advantages if you want to save for your child’s college education (and, since the 2017 tax bill, K-12 private education as well). Following the passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019, ...
Military Academy, or includes the distribution in income because qualified education expenses were used to determine the American opportunity or lifetime learning tax credits.
However, withdrawals of the account's earnings are subject to both taxes and a 10% penalty unless you use them for qualified education expenses, such as tuition, mandatory fees, and room and board.
The scholarship clause is important, because if your child does not receive a scholarship (or meet one of the other exceptions) and you withdraw funds that are not used for qualified education expenses, you will owe both taxes and a 10% penalty on the earnings. A 529 plan is portable, meaning that it can be used state by state.
To be safe, limit your 529-plan withdrawals to your beneficiary’s total qualified higher education expenses less $4,000. If you are not eligible for the American Opportunity Tax Credit but plan on claiming the Lifetime Learning Credit, the adjustment can be for as much as $10,000.
In the event any of the withdrawal turns out to be non-qualified, the earnings portion ends up on your beneficiary’s income tax return, where it presumably benefits from lower (or zero) tax rates.
As long as total expenses (as adjusted) equal or exceed total distributions, you’re done: the 529 distributions are tax-free and you have nothing to report on your tax returns. If total expenses are less than total distributions, you are not done.
A problem can occur if you withdraw money from your 529 plan this year, and then wait until next year before actually making the payment to the school; or, if you paid the expenses last year from other resources and now wish to reimburse yourself by taking a withdrawal from your 529 plan. By spanning two tax years, you are risking a mismatch that can result in tax and penalties on at least a portion of the distribution.
First, count up all the qualified higher education expenses paid for your account beneficiary during the calendar year. It doesn’t matter if payments were made with 529 distribution proceeds, cash on hand, student loans, or most any other source. (But don’t include any expenses covered by tax-free scholarships.)
“Double-dipping” is not permitted when it comes to 529 plans and the education tax credits. If you, or your beneficiary, claim either the American Opportunity Tax Credit or the Lifetime Learning Credit on your federal income tax return, you must adjust total qualified expenses for purposes of determining the tax treatment of your 529-plan distributions.
In the right circumstances, Kerry’s American Opportunity Tax Credit will be enough to offset all of her federal taxes, including any tax attributable to the 529 non-qualified withdrawal, and the 10-percent penalty waiver means the non-qualified withdrawal ultimately has no tax consequences.
529 plan qualified expenses. For adult learners, qualified 529 plan expenses include tuition, fees, and required books, supplies and equipment. The classes must be provided by a college or university that is eligible for Title IV federal student aid. This includes community college courses and undergraduate and graduate degree programs.
Most states require residents to use their home state’s 529 plan to qualify for the income tax benefit, but Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer a state income tax benefit for contributions to any state’s 529 plan.
In some states, adult students may be able to reduce their state income taxes by funneling their tuition payments through a 529 plan. This can be like getting a discount on tuition.
Adults continuing their education may qualify for a maximum $2,000 federal tax credit through the Lifetime Learning Tax Credit. In 2019, taxpayers with a modified adjusted gross income (MAGI) of $68,000 or less ($136,000 if married filing jointly) may claim a 20% tax credit on up to $10,000 in combined tuition and mandatory fees for themselves, their spouse and dependent children. The amount of the tax credit is reduced for taxpayers with MAGIs between $58,000 and $68,000 ($116,000 and $136,000).
With the exception of four states (Michigan, Minnesota, Montana and Wisconsin), funds are not required to be held in a 529 plan account for any specified amount of time to be eligible for a state income tax benefit. A student may claim a state income tax deduction or credit even when they make a 529 plan contribution and immediately withdraw ...
The 529 plan account owner and the beneficiary can even be the same person. If a child has leftover money in their 529 plan account after finishing college, or decides not to go to college, their parent can use the funds to continue their own education. Parents can change the beneficiary to themselves by completing a form found on ...
529 plans for adults. In most cases, the 529 plan account owner can name any U.S. citizen or resident alien with a Social Security number or taxpayer identification number as the beneficiary, regardless of their age. The 529 plan account owner and the beneficiary can even be the same person. If a child has leftover money in their 529 plan account ...
If you withdraw money from a 529 for ineligible expenses, you’ll generally have to pay taxes and a 10% penalty on the earnings (but not on the contributions). A portion of each withdrawal is considered to be from principal, and a portion comes from earnings, based on the ratio for your total 529 balance. See the “Qualified Tuition Program” section of IRS Publication 970 for worksheets to help you calculate the taxable amount if you take ineligible withdrawals.
You don’t have to pursue a college degree to be able to use tax-free money from a 529 college-savings plan to pay for classes. by: Kimberly Lankford. March 13, 2019.
Answer: As long as you are taking the course at an eligible institution, the cost of tuition, fees, required books and software can be withdrawn tax-free from the 529—even if you aren’t in a degree or certificate program.