529 Plan
Payments
Based on the
tax consequences associated with 529 plans, if the student’s account balance is
zero at the time payment is received from a 529 plan the check can be processed
as a deposit for a future term or returned to the issuer. Typically,
there are several options for withdrawals and the distributions are reported
different to the IRS based on type (Beneficiary or Account Owner’s SSN):
- Qualified withdrawal to the participant/account owner
- Qualified withdrawal to the beneficiary/student
- Qualified withdrawal to am eligible college or university
- Nonqualified withdrawal to the participant
Qualified
higher education expenses include:
The costs of tuition, fees, books, supplies and equipment required for
enrollment or attendance, certain room and board expenses of a Designated
Beneficiary at an Eligible Institution of Higher Education, expenses for the
purchase of computer or peripheral equipment (as defined in Section
168(i)(2)(B) of the Code), computer software (as defined in Section
197(e)(3)(B) of the Code), or Internet access and related services, if such
equipment, software, or services are to be used primarily by the Designated Beneficiary
during any of the years the Designated Beneficiary is enrolled at an Eligible
Institution of Higher Education, and expenses for special needs services in the
case of a special needs beneficiary that are incurred in connection with
enrollment or attendance at an Eligible Institution of Higher Education.
- Room
and board expenses – Room and board expenses are eligible expenses only if the
Designated Beneficiary is enrolled in a degree or certificate-granting program
at least half-time. For students living at home with parents, as well as
students not living in institutionally owned or operated housing, the Eligible
Institution of Higher Education “cost of attendance” allowance for federal
financial aid purposes will be the room and board amount treated as a qualified
higher education expense. For students living on campus or off campus in
institutionally owned or operated housing, the amount of room and board treated
as a qualified higher education expense can be the actual amount charged to the
student.
- Tax treatment – Qualified
withdrawals, including any earnings, will not be subject to federal taxes. (For
state tax treatment, please check with your local state government.)
Participants should retain adequate records relating to withdrawals for tax
reporting purposes. If the distribution is made directly to the Eligible
Institution of Higher Education, the Designated Beneficiary is treated as the
distributee for tax purposes.
Non-qualified
withdrawals:
Withdrawals other than qualified withdrawals or withdrawals due to the death or
disability of the Designated Beneficiary or receipt of a qualified scholarship
or attendance at a U.S. military academy by the Designated Beneficiary.
- Tax
treatment – The earnings portion of a nonqualified withdrawal is subject to
applicable federal and state income tax and a 10% additional tax imposed by
federal tax law. Participants should retain adequate records relating to
withdrawals for tax reporting purposes.
Non-qualified
withdrawals with exceptions:
Exceptions to the 10% additional tax imposed for non-qualified withdrawals
include the death or disability of the Designated Beneficiary; the receipt of a
scholarship by the Designated Beneficiary, to the extent the amount withdrawn
does not exceed the amount of such scholarship; the attendance by the
Designated Beneficiary at a U.S. military academy; or the use of the American
Opportunity tax credit (which modifies the prior Hope Scholarship tax credit)
or Lifetime Learning tax credit as allowed under federal income tax law.