Can Coverdell and/or 529 college savings plans be ...
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philwills2002
New Member

Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents?

 
4 Replies
Opus 17
Level 15

Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents?

That certainly does not fit the intent of the law that established the accounts.  You aren't supposed to get tax benefits for living at home and incurring ordinary costs you would have incurred anyway.

 

What the IRS actually says is this:

The expense for room and board qualifies only to the extent that it isn't more than the greater of the fol- lowing two amounts.

  1. The allowance for room and board, as determined by the school, that was included in the cost of at- tendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

  2. The actual amount charged if the student is resid- ing in housing owned or operated by the school.

The amount charged by the school is zero, or so I expect.  So the question is, when the school put together the student's financial aid package and determined their "cost of attendance" for financial aid purposes, did the school know the student would be living at home, and how much did they include for "room and board" in the cost of attendance determination.

 

If I had to guess, I would guess that the school gives commuter students a transportation allowance in their "cost of attendance" but does not include very much, if anything, for room and board.  But you will have to check your student's aid package. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Hal_Al
Level 15

Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents?

Q. Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents.

A.  Actually the answer is yes. It's clearly yes in the case of food (board).  You are limited to your actual cost or  the amount the school charges resident students, whichever is less.   If the student is paying rent  to the parents, you may claim "room"; again the amount of rent he actually pays or the schools room charge, whichever  is  less.   It's not clear whether "room" is allowed otherwise,  as there is little or no incremental costs to the parents. 

Opus 17
Level 15

Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents?


@Hal_Al wrote:

Q. Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents.

A.  Actually the answer is yes. It's clearly yes in the case of food (board).  You are limited to your actual cost or  the amount the school charges resident students, whichever is less.   If the student is paying rent  to the parents, you may claim "room"; again the amount of rent he actually pays or the schools room charge, whichever  is  less.   It's not clear whether "room" is allowed otherwise,  as there is little or no incremental costs to the parents. 


I know @Hal_Al is much more expert than me on this, but three doubts come immediately to mind.

 

1. Even if the student's food (at home) is allowed, I can see a recordkeeping problem for the parent in proving how much the student's food costs.

 

2. The school would still have to include an allowance for room and board in the student's financial aid package.  And the maximum allowable cost would not be what the college charges for food on-campus, but what the off-campus allowance is.

 

3. If the student pays rent, to allow the parents to use the ESA, the parents have to report the rent on their tax return, which will cause all kinds of other paperwork problems, may result in taxable income to the parents (depending on the expenses and depreciation they claim) and will create a taxable event when they sell their house, even if they would normally qualify for the capital gains exclusion.

 

On the other hand, I just checked my college's web site and their on-campus cost for room and board is $11,500, and their financial aid package allows $4,800 for room and board as part of the "cost of attendance" for students who live with their parents.  In that case, and based on a reading of publication 970 and section 529, a parent could withdraw $4,800 from the ESA to cover room and board for a student living at home and attending my college, without having to show either food bills or rent payments. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Carl
Level 15

Can Coverdell and/or 529 college savings plans be used to cover room and board if your full time college student is living at home with parents?

Several things to keep in mind if you go this route. First, no matter what you do this *WILL* raise flags with the IRS. No question about it. When that happens is anyone's guess. But typically it occurs 24-36 months after the tax return has been filed and processed.

Now if you the parent are the named beneficiary on the 529 plan, I have no doubt the flag will be raised at the IRS before your tax return processing will be completed.

If the student (your son) is the named beneficiary, then you need to have a formal legal rental contract between you as the landlord (not as the parent) and your son as the student (not as your dependent). Furthermore, you need to report that rental income on SCH E as a part of your personal 1040 tax return. Take special note that while you can charge anything you want for the rent, the amount of rent claimed against the 529 funds can NOT exceed what it would cost the student to live on campus, unless the student has a formal letter from the school informing them that campus housing is not available. Such a letter would be required for each semester.

In order for rent to be claimed against 529 funds, the rent paid must be "in direct support" of the education. (this is what will raise flags with the IRS if the student is living at home.) Now while I can't be specific, I do know that the IRS has a problem with a parent charging their own child rent to live at home in what is basically their own room they lived in the first 18 years or so of their life without paying rent. They typically view it as attempting to defraud the IRS. So you and the student can fully expect to be audited at some point in the future. From all the stories I've heard "through the grapevine" on this, you will most likely lose.

 

So if your student does not enroll and attend as a full time student for the summer semester, any rent paid is *NOT* "in direct support" of the education. Therefore it would not be an allowed expense against 529 funds.

 

As for the "board" part of room and board, I would recommend you don't even go there. Just include the cost of food as part of the rent. But keep in mind that whatever you spend on food for your own child is just flat out not a tax deduction by any stretch of the imagination.

Now me personally, I would not do this. I see it as hanging out a sign that reads, "Hey! IRS! Audit me now! Please! Hurry! Quick! Fast! I want to pay lots of back taxes, interest fines and penalties!"

 

 

 

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