This is basically answered in your other post at <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4514117">https://ttlc.intuit.com/questions/4514117</a>
You can withdraw money from your 529 at any time, for any reason, in any amount. The employer tuition reimbursement has nothing to do with this, and is completely separate and irrelevant. Any and all 529 funds not used for qualified education expenses is the same tax year they are withdrawn, will be taxable income to the beneficiary recipient of those funds.
For the employer tuition assistance, I think the max amount is $5,150 and any amount after that has to be included on your W-2.
Most think that if it's under that amount and not on their W-2, then the IRS won't know about it and believe they can get away with "double dipping" by claiming qualified expenses paid with other monies. Not so fast, While it may not be on our W-2, the employer does still report it to the IRS on their own business tax return. So that means that while things may seem to work out at first, when the IRS does their reconciliations upon the completion of the tax filing season, they'll catch it anywhere from 24- to 36 months down the road after you've filed. Then along with the back taxes you'll pay to the IRS, add to that the interest that's been accumulating, along with any fines and penalties that may be assessed. So it's not worth it. What you may "save" up front, you will lose much more of down the road.
Thank you, Carl, for clarifying. So basically, what you're saying is if tuition costs $7k, and employer reimburses $5k, I can distribute $2k from the 529 as qualified expenses without "double dipping"?
That's right. What the employer paid is basically treated like a scholarship per-se.
You can't pay for tuition with tax-free money and also take a tax-free withdrawal.
If the total tuition is less than or equal to the tax-free reimbursement, then you can't take a tax-free 529 withdrawal. Any withdrawal would be considered non-qualified.
If the tuition reimbursement is taxable, or the total tuition is more than tax-free reimbursement, then you can take a 529 withdrawal to cover the difference and it will be tax-free.
I don't understand how this is true when tuition requires payment at the beginning of the semester but my employer won't reimburse until after grades are submitted at the end...How can I avoid double-dipping if I had to withdraw 529 funds to pay for the semester up front but I can't get reimbursed until after grades are posted at the end? Does that mean those funds just have to go back into the 529?
Here's the bottom line:
Any education assistance monies that you receive in a tax year from any source (employer, 529 plan, scholarship, etc.), that is not spent on *qualified* education expenses in that same tax year, is taxable income to you. It doesn't matter where that money comes from.
Now some clarification of "qualified" expenses is called for here, only because there are 529 funds involved.
The only *QUALIFIED* education expenses are tuition, books and lab feels. That's it. There are no exceptions. But with 529 funds, in addition to the three qualified expenses they can also be used for the unqualified expense of room and board *PROVIDED* that room and board is paid *in direct support* of the education.
Now in your case I doubt you would qualify to claim the room and board expense against the 529 funds, as I am of the impression that where you lived in 2018 would not have changed had you not been in school. Generally, the only students that qualify for the room and board expense against 529 funds, are undergraduate students that qualify as a dependent on their parent's tax return. Since you worked in 2018 (full time I presume?) I am making the assumption that there is no way possible your parents would or could qualify to claim you as a dependent. Now I can get "into" that if you like. But that's kinda deviating to far from your root question.
Put as simply as I can, if you pay in advance, and are later reimbursed tax-free, that retroactively makes the 529 withdrawal non-qualified.
Thanks, I work full-time and the monies are for qualified graduate tuition and books only. This is very confusing and no one explains it well.
@ebwhite8617 not that it matters, but here's my personal take on it.
If my employer want's to "give" me $5,150 dollars to pay for qualified education expenses and I don't need that money to pay for those expenses with, thus making it taxable, then my only question is, "who to I make the tax payment check too?" I didn't have to "earn" that money per-se. It's free money. So I don't have a problem with paying taxes on it. (My issues with how my tax money is spent is a totally separate issue. But when it comes to paying "my fair share", I have no issues with that.)
My son seems to think that by providing a receipt of 529 payments (I made) to the University, that he can take that and file it as "paid education" and get "reimbursed" from his employer. Clearly, I'm using quotes to emphasize that he himself didn't pay for education and so wouldn't qualify to get reimbursed, but I wanted to make sure I'm not missing something here? To me this sounds unethical.
So does that initial $7k come from the 529 plan? Example: $7k comes out of the 529 plan, then the employer reimburses $5k. That $5k is deposited into the 529 plan which means there is a net $2k coming out of the 529 plan. Is that correct?
I think you son is correct. The education was paid for. That is, it wasn't a tax free scholarship. Where the money came from is not relevant, unless the employer plan has some specific rule. For example, I was ineligible for my employer's plan because I was collecting Veteran education benefits.
Whether your son got the money as gift or loan form his parents should not matter to the employer. Furthermore, if your son is the beneficiary of your* 529 plan, that money is considered his as well as yours.
It sounds like all the employer is requiring is a receipt that the tuition was paid. There's nothing unethical here. It's your son's or his family's money.
*For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student, who may or may not be the parent's dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution.
In the case where a student receives both a tax free employer reimbursement and a 529 plan distribution for the SAME expenses, tax will have to be paid on one of those sources (usually the 529 plan)
"My son seems to think that by providing a receipt of 529 payments (I made) to the University, that he can take that and file it as "paid education" and get "reimbursed" from his employer."
Yes, he can and should. There's nothing unethical about taking the money**. Family money was used to pay the tuition. It does not have to be "his" money, unless the employer's plan has such a restriction. Even then it's probably still OK. If you are the owner of the 529 plan and your son is the beneficiary, the money in the plan is his money, too.
** Tax wise , there is a problem. You cannot double dip on the tax benefits. If your son is getting tax free reimbursement (employer plans are allowed to pay up $5250, per year, in tax free reimbursement), you cannot also count the same tuition to claim the earnings exclusion on the 529 distribution. One of you has to pay tax on the money you received. It should probably be you, since you will only have to pay tax on the earnings portion of the distribution.
@Hal_Al Can the tax exempt employer reimbursement then be deposited into the 529 account? Would this situation then be considered tax exempt money being reimbursed into tax exempt 529 plan with the appropriate "money trail" to show source of income?
Q. Can the tax exempt employer reimbursement then be deposited into the 529 account?
A. Yes. You can make additional 529 plan contributions. It doesn't matter where the money comes from.
Q. Would this situation then be considered tax exempt money being reimbursed into tax exempt 529 plan with the appropriate "money trail" to show source of income?
A. No. All contributions to a 529 plan are "after tax" money. The only exception is accrued interest on US Savings Bonds
Hi - in 2021 tuition was 30k.
1. employer assistance of 10k ($5250 tax free)
2. 529 withdrawal
Q. In order to avoid double dipping do I take 30k-10k?
or 30k - 5250 tax portion?
Thank you in advance
Q. Employer assistance of 10k ($5250 tax free). In order to avoid double dipping do I take 30k-10k or 30k - 5250 tax portion?
A. Simple answer: $24,750 (30k - 5250 tax free portion).
But, if you are going also to claim a tuition credit or deduction, you need to adjust for that too. For example, if you want to claim the maximum American Opportunity Credit* (the most generous credit), you will need $4000 of qualifying expenses. So, you would only take a $20,750 distribution from the 529 plan (30,000 - 5250 - 4000 = $20750).
*Graduate school is not eligible for the American Opportunity Credit. You would want to claim the Lifetime Learning Credit (LLC). It takes $10K of expenses for the maximum LLC. You would only withdraw $14,750 from your 529 (30K - 10K - $5250 = 14,750).