Do I need receipts to use 529 funds for food for my college student son living off campus? Can I pay mortgage with 529 funds?

[trancine]

My college student son lives off-campus and is not enrolled in a college meal plan. I know I can use 529 funds to pay for his food.  The problem is it is too big a pain to save receipts for every grocery or restaurant purchase.  Am I allowed to estimate his food expenses based on the the posted yearly off-campus Living and Indirect Expense Allowances for his college, which is  $18,144.00? I think it is reasonable that  1/3 to 1/2 of this amount (about $8K) can be considered food (versus housing.)  Can I just withdraw $8k from the 529 for this?  Or is this risky without receipts?  I suppose I could use credit card purchases categorized as food or groceries, but he buys a lot with cash.

As for housing costs, he lives in an off-campus house I purchased as an investment.  His housemates pay me rent.  This was cheaper than living in the dorm.  I think it is too complicated to try to use 529 funds to pay for utilities or mortgage (especially since I bought the house with cash from a HELOC on another property) but let me know if anyone thinks otherwise. 

Thanks.

[Hal_Al]

Q. Do I need receipts to use 529 funds for food for my college student son living off campus?

A. Simple answer No.  On audit, the IRS is likely to accept the schools published rtes and that is the maximum you are allowed to claim.  On the other hand, it wouldn't hurt to throw what receipt you do have into a shoe box.

Q. Can I pay mortgage with 529 funds?

A.  No, that's an investment expense. You can count utilities.

References: 

https://www.forbes.com/sites/josephhurley/2016/02/04/dont-make-these-mistakes-when-reporting-529-pla...

 https://www.savingforcollege.com/article/using-your-529-plan-to-pay-for-room-and-board

[Carl]

You're talking about the unqualified but allowed expenses of "Room & Board" here, on a 529 distribution. Here's the scoop.

 - For the "room" part of room and board, your mortgage payments on the property are flat out "NOT" deductible. It's not an education expense any way you look at it. It's an investment expense at best. You'll be reporting the rental income/expenses on SCH E anyway since you are "in fact" renting it out... even if only renting less than 100% of it out. (and that's true in your case.)

For the "board" part of room & board (which is basically food and utilities) since the college does offer a meal plan, what you claim for food can "NOT" exceed what a meal plan would cost for the semester. (So no steak & lobster for lunch/supper every day.) To that you can add whatever percentage of the utilities you pay with 529 funds on behalf of the student.

Next, be aware that what is paid for room and board must be "in direct support" of the education. So if the student does not enroll in classes for the summer semester, then you can not claim or deduct the cost of food and utilities for that semester since it would not be in direct support of the education.

The above takes care of the 529 and educational related stuff I think.

The rental income will be reported on SCH E of course, and I'm sure you're aware of that. Just understand that since your son lives in the same property and your son does not pay rent (I'll expand on the bold print later) that means the property is not 100% business use. It's important to note that in the program so that the program can make the correct splits on property taxes, and mortgage interest for you, automatically.  But for the property insurance you'll have to "do the math" manually, yourself in order to get the correct amount to enter for the SCH E. Now about that bold print above.

If your student is the named benificiary on the 529 distributions *AND* you charge your son the same rent as you do everyone else, this helps all of you out tax-wise all the way around.

First, your son as the name beneficiary on the 529 will be the one whose SSN will be the "benificary recipient" box on the 1099-Q. That means your son will report that distribution on his tax return, and he will be the one to claim the expense as an "allowed" education expenses (even though it's unqualified, it's allowed per my statement above.)  That will offset the taxability of that distribution to your son if he then uses that distribution to pay you rent.

That makes the property 100% business use and you'll find that even when you claim it as income on SCH E, more than likely the rental property will still show a passive loss "on paper" (meaning on your tax return) resulting in you as the landlord not having to pay taxes on it either.

Finally, just so you know - I've had a few rental properties for a few decades now, and put two kids through college. So if you need further help, just post back. I don't claim to know everything, but I've a fair bit of experience with what you're dealing with now. So if there's a question I can't answer, I'll tell you that up front and we'll find someone who can answer it.

[trancine]

thank you! this exactly what I had hoped to hear about food, and now I will go figure out utilities too.

[trancine]

Carl, thanks so much.  I've ready your reply 3 times and am still processing all the info.  A few follow-up questions:

1. I need to withdraw the cost of a semester meal plan from my son's 529 before 12/31, right?  

2. ditto for 1/4 of the house utilities during the semester (gas, electricity, wifi, garbage, water)  since my son shares the house with 3 other roomates. 

3. Do I have some time to figure out whether I am going to charge my son rent?  He has never filed a tax return before.  He earned about 3K over the summer.   

Thanks again.

[Carl]

1. I need to withdraw the cost of a semester meal plan from my son's 529 before 12/31, right?

Yes. A 529 withdrawal is taxable income *initially* in the tax year it is withdrawn. It's taxability is offset by the qualified and allowed expenses it is used to pay for *in the same tax year it is withdrawn*.

2. ditto for 1/4 of the house utilities during the semester (gas, electricity, wifi, garbage, water) since my son shares the house with 3 other roommates.

Yes. The same "timing rule" applies as explained above

3. Do I have some time to figure out whether I am going to charge my son rent? He has never filed a tax return before. He earned about 3K over the summer.

Are you asking about this for the 2020 tax year? At this point if you're considering charging him rent for 2019 it's only doable if the student is already the named beneficiary on the 529. At this point, it's a bit to late (I think) to change the beneficiary if it's not the student already. If you've already made any withdrawals and then you change the beneficiary, the first named beneficiary will receive a 1099-Q for the withdrawals made prior to the change, and the new beneficiary will be receive a 1099-Q for any withdrawals made after the change. 

[Milleriffic]

This upcoming Fall semester my son will also not be on the meal plan.  We intend to buy his grocery's using the amount the school would have charged for a meal plan.  My question is where in turbotax will I add in the amount I deduct from the 529 to pay for grocery's?  In the past the school had included it in the 1098T I believe.  Thanks so much.

[Hal_Al]

Q. Where in TurboTax (TT) will I add in the amount I deduct from the 529 to pay for groceries?

A.  In the education expenses section. You will get a single box to enter one number for total room and board (R&B)  paid. To get the screen to enter Room & Board, answer yes when asked if you have book expenses. Also, enter the 1099-Q for the 529 plan distribution before entering educational expenses, including R&B (TT will not give you the R&B entry box unless you need it for a 529 or ESA distribution). 

Off campus rent and food are eligible expenses for a 529 distribution, but the amount is limited to the lesser of your actual cost or what the school charges on campus students for R&B (technically the schools "allowance for cost of attendance" for financial aid purposes).