You can choose to have the money sent directly to the school, the account owner or the beneficiary. Since the money was used for qualified expenses, none of it is taxable. The simplest thing to do is just don’t enter the 1099-Q in TurboTax (TT). With careful planning, you can avoid having money left over in your 529 account once your child graduates. You can let the money sit in the account in anticipation of your child continuing on to graduate school or another post-secondary institution. If so, you’ll want to rethink your investment strategy depending on how soon the funds will be needed so you can take full advantage of the potential for growth over time.
If the amount of your annual 529 annual distribution is equal to or less than the amount of your adjusted qualified educational expenses, you won’t owe federal income tax on this distribution. Your “adjusted” educational expenses include the total of your qualified expenses minus any other tax-free educational assistance you may have received such as a Pell grant or scholarship(s). Your 529 savings plan administrator will, in most cases, provide an annual statement that reports your contributions and earnings, including the amount you withdrew from the plan. But it’s you, not your program provider, who is responsible for accurately reporting to the IRS. If your withdrawals are equal to or less than your qualified higher education expenses (QHEEs), then your withdrawals including all your earnings are tax-free. If your withdrawals are higher than your QHEE, then taxes, and potentially a penalty, will be due on earnings that exceed your qualified expenses.
If the 529 funds are used on non-qualified expenses, the earnings portion of the distribution will be subject to tax (as with regular investments) plus a 10% penalty. On the form there are typically 3 sections, showing the total distribution, the earnings portion of that distribution, and the principal (your initial contributions) portion https://turbo-tax.org/ of the distribution. If you spent the money on a non-qualified expense, your taxes and 10% penalty will be only applied to the earnings portion of your distribution. If you have scholarships and tax-credits to consider, or spent the funds on non-qualified expenses, you might need to do a little math to make sure there are no taxes owed.
- But if you receive a nonqualified distribution, you’ll have to report the earnings as taxable income, and you may also have to pay a 10 percent federal tax penalty.
- Paper receipts can lose their saturation over time, so scanning and capturing them before they degrade in quality is important.
- If you do, the IRS will consider it double dipping, so you’ll want to factor in whether you’ll be claiming this tax credit when deciding how much to withdraw from your 529 account.
- Prior to the 2018 tax year, 529 plans were geared toward post-secondary educational institutions, including colleges, universities and technical schools.
If the student receives a $2,000 tax-free scholarship, the AQEE for the student in this example is reduced further to $4,000. Tuition and fees are only about half of college costs at 4-year public colleges and about two-third of college costs at 4-year private non-profit colleges. The tax penalty is also waived due to the death or disability of the beneficiary. Keeping track of your 529 withdrawals and spending is critical to avoiding a surprise tax bill. If you opt to receive the funds personally, 529 plan servicers usually let you choose between having the funds deposited into your bank account or receiving a check, which may take longer. Once you open the account and choose a beneficiary, you can contribute as much as you want each year until you reach the aggregate limit for the state where the 529 plan is located.
To qualify under this rule, the recontribution must be made not later than 60 days after the date of the refund (Sec. 529(c)(3)(D)). Make sure you’re familiar with 529 withdrawal rules so you can maximize the tax benefits you get from your 529 savings accounts without incurring a penalty. Keep in mind that even if you don’t use all your 529 funds to pay for college, there are plenty of other ways to spend unused 529 plan money without paying tax on it, such as changing the beneficiary on the account or making student loan repayments. Under Code Sec. 529, a State or its agency or instrumentality may establish or maintain a program that permits a person to prepay or contribute to an account for a designated beneficiary’s QHEEs.
What is the earnings portion of a 529 plan?
Textbooks count as an education expense, but only those included on the required reading for the course. This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction. Answer simple questions and TurboTax Free Edition takes care of the rest. Get unlimited live help from tax experts plus a final review with TurboTax Live Assisted Basic.
Perhaps you took a distribution last year and received a Form 1099-Q from the plan – does this mean you have to report the earnings? If the funds were spent on qualified education expenses or rolled into another 529 plan you don’t have to report anything. However, 529 funds spent on purchases that do not fall into one of these two categories will be considered taxable withdrawals. If you’ve simply been contributing to an existing 529 account you may not have to report anything on your federal income tax return. Unlike an IRA, contributions to a 529 plan are not deductible and therefore do not have to be reported on federal income tax returns.
Answers to Questions about Distributions from a 529 Plan
If possible, avoid making the distribution payable to the account owner. When 529 plan distributions are payable to the beneficiary, the beneficiary’s college, how to report 529 distributions on tax return or K-12 school, a Form 1099-Q will be issued to the beneficiary. Non-qualified distributions payable to a parent may result in a higher tax liability.
Are 529 earnings taxable?
Before you start withdrawing funds and paying for educational expenses, there are important rules you should know. If you’re thinking of taking out loans that start incurring interest immediately, you may want to spend 529 funds first, deferring these loans until later. Another situation that would call for using 529 plan funds first would be if there’s a chance your child may graduate earlier or receive some other funding down the road, such as a scholarship. You should receive a Form 1099-Q, Payments from Qualified Education Programs (Under Sections 529 and 530) from each of the programs from which you received a QTP distribution. The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis or return of investment (box 3). Here are four steps to help you understand 529 withdrawal rules, navigate the 529 plan withdrawal process, and avoid paying taxes and penalties on your savings.
While the earnings of all non-qualified withdrawals are subject to tax (as with any regular investment), there are instances where you won’t be subject to the 10% penalty. Military Academy, tax-free educational assistance, receipt of education tax credits, the return of excess funds that were previously withdrawn in error, death or disability. The two most common types of qualified education programs are state-sponsored 529 plans and Coverdell ESAs. Both types of accounts allow the account owner to set aside money to cover the qualified education expenses for the person who is designated as the beneficiary.
Form 1098-T is issued by a college or eligible educational institution and it lists the dollar amount paid for tuition, fees and course materials required for enrollment. This form is used to determine the eligibility for various tax credits and also serves as proof that the funds from your 529 plan were spent on eligible expenses. The result must be reported as income on the beneficiary’s or the account owner’s federal income tax return, Schedule 1 Form 1040, line 8 or Form 1040NR, line 21. If the distribution is subject to the 10% penalty tax, the additional tax must be reported on Schedule 2 (Form 1040), line 6, or Form 1040NR, line 57.
For many people, keeping track is easy because large tuition bills use up most of their 529 savings. But if you are using your 529 plan for room and board expenses, it’s smart to keep those receipts. When you pay qualified education expenses from a 529 account, your withdrawals are tax- and penalty-free. As of 2019, qualified expenses include tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, only $10,000 total can be spent each year per beneficiary on elementary, middle, or high school tuition. First, the distributed funds must be contributed to the ABLE account within 60 days after their withdrawal from the 529 plan.
If the plan so provides, room and board also qualifies (within certain limits). Calculate any taxable earnings by first calculating your tax-free earnings. Then, subtract this amount of taxable earnings from your total distributions to figure your tax-free earnings. The result must be reported as income on the beneficiary’s or the account owner’s federal income tax return, Schedule 1 Form 1040, line 8, or Form 1040NR, line 21. If the check is made out to you as the account owner, the 1099-Q comes to you.
If a distribution from a 529 plan is later refunded by an eligible educational institution, a recontribution can be made to the 529 plan. The recontribution must be made no more than 60 days after the date of the refund. The amount allowed for room and board is reasonable costs as determined by the particular QTP (Sec. 529(e)(3)(B)(i)). The maximum allowable room and board is the amount applicable to the student in calculating the financial aid cost of attendance for the institution (Sec. 529(e)(3)(B)(ii)). However, the amount eligible as room and board expense is increased to that which the institution actually charges the student, if greater than the amount used in computing the cost of attendance (Sec. 529(e)(3)(B)(ii)(II)). Non-qualified expenses include college examination, application, testing fees, transportation, and ACT/SAT test prep.You also can’t pay for related expenses that are directly in line with attending school.
The 10% tax penalty on the non-qualified distribution will be waived up to the amount of the scholarship, but the earnings portion of the non-qualified distribution will still be taxed as income. If you miss the 60-day cutoff, then the excess will be treated as an unqualified withdrawal and you’ll owe income taxes and the 10% penalty. You’ll eventually be asked what level of school the student attended and finally be given a screen to enter the expenses paid. The fact that the expenses were paid indirectly does not change the fact that the 529 plan was used for qualified expenses.