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Level 4

529 Plan Scholarship Exception reporting

I own a 529 plan for my child (beneficiary)and have never withdrawn scholarship money - it is a lottery funded scholarship and does not meet or exceed the amount of qualified expenses. The scholarship is reported from the school on a 1098T. The 529 will end up over funded, so I would like to withdraw as much as possible without the penalty. If I withdraw the scholarship money received for 2019,I have a question about reporting. We have always calculated the college costs/529 income on the parent return (always zero taxable income as our withdrawals equal our qualified expenses). If we withdraw the scholarship money, would that then need to be reported on my child’s return and would the 529 withdrawal for this need to be in her name? All prior amounts received from the 529 have been in the parents name. She will only have Schedule C income this year. If anything would need to be reported on her return, I was confused how this is handled when we would be splitting the 1098T reporting - the scholarship reporting showing on her return and the tuition expenses netting with the other 529 withdrawals for zero taxable income on the parent return. OR can we have the scholarship withdrawal also come to the parents and be reported on the parent return and reflected as the scholarship exception? I don’t want to cause any problems/additional expense for my daughter from a tax perspective.

Thank you.

13 Replies
Level 20

529 Plan Scholarship Exception reporting

Q.If we withdraw the scholarship money, would that then need to be reported on my child’s return and would the 529 withdrawal for this need to be in her name? 

 

A. You have a choice.  When, you want to withdraw  money, you tell the plan administrator where the money goes. For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.

Level 4

529 Plan Scholarship Exception reporting

Thank you. And this is still OK to report on the parent/recipient return when the document showing the scholarship money (1098T from the college) will be in the name of the child/student?  

Level 20

529 Plan Scholarship Exception reporting

Yes.  This is a common situation, not only in the case of a 529 plan, but when the parent wants to claim a tuition credit for their student-dependent's expenses.  The 1098-T is only an informational document. The info can go on either the student or parent's return and sometimes both.

Level 4

529 Plan Scholarship Exception reporting

Thank you again - that makes it easier.  Is there guidance regarding how to handle this exception withdrawal on our return?  I have never received a non-qualified withdrawal.

 

 

Level 20

529 Plan Scholarship Exception reporting

I'm not sure what you mean by "exception withdrawal".  The fact that the funding was from scholarship money  does not change the fact that you will have a distribution (withdrawal) and will get a form 1099-Q.   The only question is how will that distribution (box 1 of the 1099-Q) be split between basis (box 3 of the 1099-Q) and earnings (box 2).  The plan administrator (custodian) will make that determination.

 

As long as you used the total distribution for qualified expenses (including room & board), none of it will be taxable.   If you did not use if for qualified expenses, just enter the 1099-Q and TurboTax will treat the entire box 2 amount as taxable (not the box 1 amount).

Level 4

529 Plan Scholarship Exception reporting

Hi - I meant the fact that there is an exception to the 10% penalty for scholarship withdrawals. I wasn’t sure how a non qualified withdrawal that should not be subject to the penalty should be reported. It doesn’t look like there is a place on the 1099Q to designate what is qualified vs non qualified, so it appears that the qualified and non qualified (for the scholarship) withdrawals will be reported on the 1099Q together. I had called the investment company where we have the 529, and they indicated that the scholarship part should be withdrawn as a non qualified distribution. 

 

Thanks

Level 20

529 Plan Scholarship Exception reporting

Correct, there is no place on the 1099Q for the plan to designate what is qualified vs non qualified. The taxpayer has to do that, on his tax return.  The TurboTax (TT) interview handles this, for you.  TT completes part II of form 5329 to claim the exception to the 10% penalty.  TT also completes a worksheet for your records.

 

Reference: https://www.irs.gov/pub/irs-dft/i5329--dft.pdf

Level 20

529 Plan Scholarship Exception reporting

I don't know if this will help clarify things or not, but I"m offering it in the hopes it makes things easier and simpler for you.

Scholarships - Can only be used for the qualified education expenses of tuition, books and lab fees. That's it. There are no exceptions.

Grants - Can only be used for the qualified education expenses of tuition, books and lab fees. However, if the grant letter specifically and explicitly states the money can be used for other things then it can be used for those "other things" that are explicitly identified in the grant letter. However, those other things stated in the letter must be in "direct support" of the education. (example & explanation of direct support provided later.)

Coverdell/529 funds - Can only be used for the qualified education expenses of tuition, books and lab fees, ***AND*** the unqualified but allowed expenses of room and board. Now for the breakdown of "room & board."

Room - the cost of rent to include utilities. Generally internet access is not included in that. However, many college courses absolutely require the student have internet access in order to complete and submit assignments. Therefore so long as that requirement is in the course syllabus (of any one course the student is taking) including Internet access cost is not an issue.  Also note there is a limit on what can be claimed for the "room" part of room and board.

If the student elects to live in campus provided housing, then the rent they pay for that already includes utilities. However, if the student elects to live off-campus in non-campus provided housing by renting from a third party, then the amount claimed for the "room" part of room and board can not exceed what would be paid to the college if the student lived on campus.

In a case where campus housing is not an available option to the student, the college will provide the student a letter stating that on campus housing is not available and they have "no choice" but to seek housing elsewhere. In such a case you are not limited to claiming what the college charges. But whatever you do claim *MUST* be reasonable. What's reasonable depends on where the student is at, of course. As an example, when Michael Jordan's son attended UCF, his first year his dad paid for a $5000/month place for him to live in. The IRS found this to be "extremely" unreasonable for an undergraduate college student and only allowed $1200/mo for the months he was enrolled as a full time student.

Now if you or the student signs a 1 year lease and they don't attend as a full time student for all 12 months of the year, that's gonna suck tax-wise. If the student is not enrolled for the summer semester (typically Jun-Aug) and remains in their housing paying rent/utilities, then the costs of rent/utilities for those three months is not tax free for the 529 distribution because it was not paid "in direct support" of the education.

Board - This is the cost of food. Typically most colleges offer a variety of "food plans" for students. If your student will be attending college out of state or several hundred miles from home, more than likely you would be getting the most costly food plan for your student. That plan would feed them three meals a day, 7 days a week. Average cost for a food plan of this type is around $2000 per semester. It usually includes a few extra perks such as $200-$300 in "college bucks" that can be spent at on campus food establishments. This comes in handy when the student may be to busy to go the dining facility, or just wants to "eat in". I know my kids would on occasion use there "college bucks" to order pizza from the on campus pizza hut, and have it delivered to their dorm room.

If the student is living off compus by their own choice, then for the "board" part of room and board your claim can not exceed what it would cost for the student to have purchased the campus meal plan.  Now in situations where the college does not have an on campus dining facility and the student has no choice but to feed themselves by other means, then the cost claim for the "board" part of room and board must be reasonable. So no steak and lobster 3 times a day, 7 days a week. The IRS ain't gonna let that fly.

Now, with 529 funds used for room and board, the key phrase here is "in direct support of the education". So if the student continues renting during the summer between the spring and fall semesters and does not attend college during the summer, the room and board paid for those summer months is *not* and allowed expense that can be claimed against 529 distributions.

Finally, be aware that transportation is *NOT* an allowed education expense *no* *matter* *what*.

Level 7

529 Plan Scholarship Exception reporting

I always use the school's Cost of Attendance for Room & Board for off campus housing. That's what's recommended here too https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending

 Pay attention to the info about the AOTC credit too.   

This is way oversimplified but here's the basics:

School Cost of Attendance  (Annual # so you have to split into quarters or semesters) for Room and Board and fees

subtract Health Fee, sports fee,etc

books - adjust amount from cost of attendance as needed

subtract scholarship $ received

subtract amount you want to leave for AOTC tuition if eligible. 

add in - computer expense

add in - justifiable extra expense like extra lab $ or other class fees

That's the amount to disburse from the 529.

HTH

Level 4

529 Plan Scholarship Exception reporting

This leads me to another question! Thanks for your information. Can you calculate some sort of room and board for a child living at home and attending college? The college has dorms, but for this year, our student has been living at home. Next year, she will be living off campus in an apartment. I have the cost to attend from the school and know not to exceed that for purposes of the 529 plan room and board, but can you have room and board when living at home? 

 

thanks. 

Level 20

529 Plan Scholarship Exception reporting

Yes, you can claim board (food), based on actual cost but not to exceed the school's  on campus charge for board.   You may only claim room (rent) if  your student is actually paying you rent to live at home.

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Level 4

529 Plan Scholarship Exception reporting

Hi  - I have been trying to find guidance on taking a 529 withdrawal for scholarships paid out in prior years.  Would the rule regarding qualified expenses needing to be paid in the year of the 529 withdrawal also apply to withdrawals for scholarships?  I found a Forbes article with an example of someone attributing a non-qualified withdrawal to scholarship monies received in prior years when closing out their 529 plan, but I can't find any official guidance on this.  

 

Thanks

 

Level 20

529 Plan Scholarship Exception reporting

Yes, everything is on a calendar/tax tear basis. If you make a withdrawal in 2019  and want to claim the scholarship exception,  the scholarship must have been credited to the student's account in the same year.