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NGR
Level 1

Federal filing requirements for dependents with 529 plans

My college kid earned about $2,000 last year. Well under the federal filing threshold for earned income. She has an Education Savings Account which was sold to cover tuition and fees and college expenses. This generated about $3,000 worth of unearned income. Is she required to file a federal tax return given her unearned income exceeds the $1,100 threshold even though this unearned income is in an ESA and used for college? Thanks

2 Replies
KathrynG3
Expert Alumni

Federal filing requirements for dependents with 529 plans

It depends who owns the account. Being a beneficiary does not necessarily mean she is the owner of the account. It depends more if the funds were used for qualified education expenses than that there were earnings on the account.

 

You will potentially be entering both Form 1099-Q and Form 1098-T.

 

For more details:

 

What are Section 529 plans?

How do I enter Form 1099-Q?

How do I enter Form 1098-T?

 

Please see 2019 IRS Publication 970 Tax Benefits for Education for more details for both qualified tuition programs (ESA in your case) and the American Opportunity Tax Credit. There are different types of expenses that qualify for each.

 

For qualified tuition programs, qualified education expenses include: Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible higher educational institution, plus certain limited costs of room and board for students who are enrolled at least half-time. Includes computer or peripheral equipment, computer software, or Internet access and related services.

Also includes expenses for special needs services and computer access.

Also, for amounts paid from distributions made after 2017, includes no more than $10,000 of elementary and secondary school (K–12) tuition incurred after 2017.

 

For the American Opportunity Tax Credit, the student would only need to incur $4,000 of qualified education expenses for the entire year to qualify for the full $2,500 credit, subject to income limitations. See Income Limits for the American Opportunity Credit for more details.

 

 

Secondly, regarding your child's income, see the following resources:

Do I need to file a federal return this year?

How do I report my child's investment income?  The rules following the Tax Cuts and Jobs Act are more favorable than the pre-TCJA rules for Form 8615. For more information, click on the article: SECURE Act Retroactive Change to Kiddie Tax

@NGR

NGR
Level 1

Federal filing requirements for dependents with 529 plans

Very helpful. Thank you!

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