Understand this. The IRS works in calendar years. Schools do not. Schools work in academic years. So the reality is, it takes 5 calendar years to get that 4 year degree. What that said:
- Scholarships, grants, 529 distributions are reported as taxable income (initially) in the tax year they are received. It flat out does not matter what year that money may be *for*. The taxability of that income is offset by the "qualified" education expenses they are used to pay for *IN THE SAME TAX YEAR* the money is received.
- Qualified education expenses are reported in the tax year they are paid. It does not matter what year is paid *for*.
So for 2019, the 529 distribution "might" be taxable income. But then, maybe not. Was housing/food paid in 2019 for the student while they were attending college as a full time student for any one semester that started during the 2019 tax year? If so, then keep reading.
Scholarships & grants can be used to pay for the qualified education expeness of tuition, books, and lab fees. While lab fees is a rather broad category, there are absolutely no exceptions to this rule.
529 distributions can be used to pay for the qualified education expenses of tuition, books, and lab fees in addition to rrom and board *provided* that room and board paid was in "direct support" of the education. So if any R&B was paid in 2019 you can apply any excess 529 funds to that. But there are limits.
First there's "room" which would include rent *and* the cost of utilities. Then there's "board" which is the cost of food. There are limits that can be claimed for room, as well as limits for board.
First, room and board can only be claimed for the period of time the student was "actually enrolled". So if the student did not enroll in any courses for he summer semester, you can not claim room and board expenses for that semester.
If the student lived on campus, you can claim what was actually paid to the college for their on-campus housing. This amount is "NOT" included anywhere on the 1098-T since legally speaking, it's not a 'qualified" education expense. Yet (again legally speaking) you *can* use 529 funds for room and board *if* it was in "direct support" of the education.
If the student lived off campus then the rent & utilities claimed against the 529 funds can not exceed what it would have cost the student to live on campus, unless the student has a formal letter from the college informing them that on-campus housing was not available for that semester and they have no choice but to seek other living arraignments off campus. But even then the IRS says that rent/utility costs claimed must be "reasonable". So no $5000 a night penthouse suites. 🙂
For the "board" part, almost all colleges have some kind of on-campus dining facility. Students can pay for a "food plan" each semester based on their specific needs. For example, a student living on campus whose primary residence (their parent's house) is 500 miles away would be living there 7 days a week. So they would purchase the most expensive 3/7 plan (three means a day, 7 days a week.)
Whereas a student who lives say, 75 miles away may go home every weekend. So they would probably by the 3/5 plan (three meals a day, 5 days a week.)
Then there's the student whose primary residence is 15 miles away. They don't live on campus and they go home every day. However, it is extremely inconvenient for them to drive home for lunch between classes. So they would probably get the 1/5 plan (1 meal a day, 5 days a week)
SO whatever is claimed for the food expense for a semester against the 529 distribution can not exceed the cost of the on-campus food plan that would be reasonable for the student based on their specific situation. However, if the college does not offer meal plans and does not have an on campus dining facility, then so long as the food costs are "reasonable" it won't be a problem. In other words, no steak & eggs for breakfast with steak and lobster for lunch and dinner every day. That's just not gonna fly.
Anyway, I went through all this spiel to see if "maybe" you have room and board expenses that were paid in 2019, that you can claim against that 529 distribution you took in 2019? If not, then the bottom line is, that distribution is taxable on the 2019 return and there's really no legal way around it.
