529 distribution

[efraser]

My financial institution jumped the gun for Spring 2020 tuition, and they distributed funds to me from a 529 on Dec 30, 2019. However, I did not make the pending tuition payment until Jan 3, 2020. Now, the 1099-Q for 2019 shows a higher amount than actual education expenses for 2019. Will this impact my taxes for 2019? Basically, will I have to pay any penalties for having higher 529 distributions than education expenses in 2019? Also, is there a way to account for this discrepancy in TurboTax (e.g., specify that part of the 529 distributions for 2019 were / will be used for 2020 education expenses)?

[DavidD66]

You cannot allocate 2019 529 distributions to 2020 education expenses. 529 plan distributions must be made during the same tax year that the qualified expenses are incurred.  For a non-qualified distribution, you pay ordinary income tax and a 10% penalty on the earnings portion of the distribution.  If your student was in school in 2019, the expenses that are qualified for payment with 529 plan funds is much more extensive than the IRS definition for tax credits.  To see qualified 529 plan expenses see:

What you can pay for with a 529 plan

[NCperson]

please post the numbers on Box 1 and Box 5 of form 1098T and then Box 1 of 1099Q and i can explain the math.  

Also, how much expense do you have in Room and Board, Books and Computer expenses that are NOT in Box 1 of 1098T? 

[efraser]

1098T, Box 1 = 6424

1098T, Box 5 = 0

1099Q, Box 1 = 19000 (part of this was for a distribution on 12/30/19 that was paid toward Spring 2020 tuition just 4 days later on 1/3/20)

Books = 837

Room & Board = 4616

Computer (new laptop for school) = 759

Let me know if you need anything else. Thanks!

[Hal_Al]

Here's an excellent article on the subject.  It confirms that you can't do that;  although it does say that the IRS position on enforcement is not clear.  One option that was available was to put the money back (roll it over) within 60 days.

https://www.savingforcollege.com/article/timing-of-529-plan-distributions-must-match-qualified-expen...

We have seen several cases like yours.  Sometimes the taxpayer made the mistake and sometimes it was the plan.  Some have said they are going to claim it as a qualified distribution and hope they can get some  leeway from the IRS, if "audited", as the intent was to make qualified distribution. 

[NCperson]

1) assuming your claim your child as your dependent, the 1098T goes on YOUR tax return

2) of the $6424 of expenses, $4000 get consumed to take advantage of AOTC.  Ensure your tax return reflects this $2500 Credit.  That leaves $2424 of expenses ($6424- $4000)

3) Then the other expenses are $837+ $4616 + $759 to be added to the $2424 or $8636. 

4) Whose social security number is on form 1099Q???

5)  Since the 1099Q distribution was $19,000 and there is only $8636 of expenses, that means $8636 / $19,000 of Box 2 on Form 1099Q is NOT taxable; the rest or 54.5% of Box 2 is taxable.

6) It is taxable to whomever's social security number is on form 1099Q.  If that is your child, it may not be the biggest problem in the world.  As long as the childs total income is less than the lesser of earned income $350 or $12,000 AND there is no tax withholding, there is nothing is taxable and there isn't  even a need to file a return.

the open questions are really 1) whose social security number are on Form 1099Q and 2) how to deal with the fact that you took the distribution in late December, but the payment didn't occur until January,  Please read the rest of the thread and decide whether you consider risking an IRS audit and just saying that January payment goes with the 1099Q distribution.