529 and company tuition reimbursement

[tansari2]

If I go to school, my company will pay me an extra $5k as tuition assistance. Can I still take a $5k distribution from my 529, or will I only be able to take distributions after the $5k mark?

[Carl]

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 Any and all 529 funds not used for qualified education expenses is the same tax year they are withdrawn, will be taxable income to the beneficiary recipient of those funds.

[tansari2]

Thank you, Carl! Appreciate the help

[Carl]

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.

[tansari2]

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"?

[Opus 17]

Correct.

[Carl]

That's right. What the employer paid is basically treated like a scholarship per-se.

[tansari2]

Thank you, both!

[Opus 17]

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.

[ebwhite8617]

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?

[Carl]

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.

[Opus 17]

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.  

[ebwhite8617]

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.

[Carl]

@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.)

[RogerSnook]

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.