529 and company tuition reimbursement

[stephenshin]

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?

[Hal_Al]

@RogerSnook 

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)

[Hal_Al]

"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]

test

[stephenshin]

@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?

[Hal_Al]

 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

[Peloton115]

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

[Hal_Al]

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).