If a college has made a refund of qualified 529 expenses for which 529 funds were used, does this money have to be re-deposited to the 529 account IF there will be future expenses in the same calendar year to offset the refund?
Specifically:
Nov2019: Paid 2020 Spring Room and Board from 529 plan and claimed disbursement on 2019 taxes.
April 2020: A partial refund was provided by the university for Spring 2020 Room and Board (Rent and Meal plan due to COVID19).
If I use this refund to pay for Fall 2020 qualified 529 expenses in July 2020, do I first need to repay the refund money to the 529 plan or can the Fall 2020 expense offset this refund since it occurs in the same calendar year as the refund.
In other words, is it necessary to repay the funds within the 60day limit to avoid taxes/penalites if the money will ultimately be expensed in the same calendar year?
Any colleges expenses paid in the same calendar year, as the 529 distribution, are qualified, whether paid directly with the funds or not.
What's not clear is whether your situation applies. Your distribution was in 2019 but the expenses will not be paid until 2020.
The IRS has not, to my knowledge, yet published any guidance on how covid 529 refunds will be handled. I suspect they'll be lenient, given the circumstances. You are effectively meeting the intent of the rules.
It is clear that the 60 day rule for refunds does apply. Even though it's a hassle, re-contributing the money may be the safe move.
Reference: https://www.savingforcollege.com/article/can-i-recontribute-a-refund-to-my-529-plan
Hal_Al....so for clarification, I paid for both Fall 2019 and Spring 2020 expenses in November 2019 and made corresponding withdrawals from the 529 plan to cover the expenses. Under normal circumstances, this would all be correct.
The college decided to refund room and board expenses in April 2020 because of COVID.
Any refund by the school of these expenses SHOULD be deposited back into the 529 within 60days to avoid penalites or taxes.
HOWEVER, since I will have Fall 2020 expenses coming due in July, I was wondering if I could avoid re-depositing the COVID refund into 529 because I will have offsetting expenses due in July and they occur in the same calendar year (tax year) as the refund. So you see, I just wouldn't withdrawal the full amount of Fall 2020 expenses. Instead I would reduce any future 529 withdrawal by the amount of the COVID refund.
I don't know, if that technically meets the rules. You might check with your plan administrator.
To be safe, you should put the money back. It may be a a hassle, but it meets the rules.
yeah, unfortunately plan administrators do not answer tax questions. It's sort of a vicious circle I'm in here.
Dear Champ: I have a related question if you don't mind. My son's first year tuition of $4089 was taken out of his 529 on 8-15-19. Sent to the University 8-21-19. He quickly dropped out and we did not find out right away. He got a full tuition refund. We refunded the 529 the full $4089 on 10-29-2019. Should I even bother reporting all this? The 529 outfit did send us a 1099-Q listing the withdrawal. The refund to the 529 account was a few days over the "60-day limit." Thank you for your time and expertise. - Paul, Albuquerque, NM, USA
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.
I asked the exact same question but likely not as clearly as you did! My daughters received the refunds and deposited them, and my plan was to do the same- reduce the 529 withdrawal in 2020 by the amount of the refund. I was past the 60 days to redeposit when I first read about this in Kiplinger magazine, and my daughter already deposited the funds. I have this situation with 2 children and 2 529 plans. They both will be filing a tax return and could report the refunds as taxable income, but that doesn't seem fair when I can just reduce the 529 withdrawal this year. Did you find any additional information on this? I know your question was a couple of months ago.
For 2020, the IRS has issued temporary guidance to extend the usual 60 day redeposit window so that you may return tuition refunds to the 529 plan by July 15, 2020 in order to avoid a situation where the funds create taxable income. When returning contributions to the plan sponsor, be sure to indicate that the funds are a recontribution by including a letter of instruction or other notation with the funds.
Guidance is less clear regarding whether applying the funds to other expenses in 2020 would allow for the same tax treatment, though there is some reason to believe that it may. However, returning the funds to the plan sponsor is the most clear path to avoiding income tax and/or penalties on the amount of the refund.
If the original checks from the schools have been cashed, can I just send a check from my personal account for the amount of the refunds?
Thanks Susan. Good info.
Note that the July 15 recontribution date date applies to those receiving refunds in 2020. Posters who asked about refunds received in 2019 would not be covered.
See this update:
The most recent comment says:
My college refunded tuition paid with 529 Plan funds. What do I do?
May 01, 2020 : H&R Block
In most cases, if your college issues a refund for a qualified expense, you have 60 days to reinvest the money back into your 529 account. Right now, you might be counting the days since your college issued the refund to see if your 60-day window has passed. Luckily, recent IRS guidance gives you some additional time to recontribute the refunded amount back to your account.
With the IRS announcement, you have the following options:
When you receive a refund from the college and do not deposit it back in the 529 plan within 60 days but rather use the refund to pay a future tuition expense in the same tax year, how should this be accounted for using TurboTax? You can answer "Yes" to the question if you received a refund and "No" to the question if you deposited the refund back into the 529 plan. However there is not an option to indicate that you used the refunded amount for future tuition in the same tax year. Is
Answer No when asked it you got a refund. You did not effectively get a "refund", you just payed different expenses. All you need to do is match distributions to qualified expenses, paid for, in the same calendar year.
Similar scenario as previous post;
Monies were deducted from 529 Plan to pay for room and board
Partial refund was given by the school in 2020 due to covid pandemic
I did not put the money back into the 529 plan nor did I use it to pay for any college expenses n 2020
1) Does this count in my taxable income or in my son's taxable income?
Turbo Tax is showing the following message after inputting the scenario;
"Based on the education expenses you've entered, the student beneficiary must report $xxx of taxable income from this distribution"
2) If my son (beneficiary of the 529 plan) shows limited taxable earned income does it make more sense to have this situation report for him? As based on his total earned taxable income, he would more than likely not meet the criteria to file a return.
Thanks for you help!!
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.
Q.1. Does this count in my taxable income or in my son's taxable income?
A.1. Whichever one of you is the recipient. Based on the TT message, it sounds like your son is the recipient.
Q.2. If my son (beneficiary of the 529 plan) shows limited taxable earned income does it make more sense to have this situation report for him?
A. 2. Yes, but not by much*. But, as explained above, it's not optional. It must go on the recipient's return.
*The taxable portion of the distribution is unearned income. As such, it is subject to the "kiddie tax" where most of the taxable amount is still taxed at the parents rate. $1100 to $2200 will be taxed at his rate, depending on his other income.
Thank you for the reply...........follow-up question;
1) If my son has no other unearned income (other than the unearned income mentioned in the previous scenario) and both his total unearned income is less than $1,000 and his total taxable income is also less than $1,000, he is not required to file a federal return, correct?
Thanks again for you help,
Normally, the answer to that question is yes. The filing threshold is $1100, so he does not need to file. But the taxable portion of the distribution may be subject to the 10% non qualified distribution penalty. So, a return would be required to pay that.
If you qualify for an exception, to the penalty (a credit was claimed or tax free scholarship covered some of the expenses), you do not need to file a regular tax return, as no penalty is due. Technically, you are still required to file form 5329, to claim the exception. Form 5329 can be filed by itself (it does not have to be part of a full tax return).
https://www.irs.gov/pub/irs-pdf/f5329.pdf
I withdrew $3,000 from my granddaughter's 529 college fund. within 60 days I redeposited $2,000 back into the fund. How do I handle this on my taxes.?
@ashubuta40 Depends on what did you do with the other $1000. If it was used for qualified educational expenses, including room and board for a half time, or more, student, you do not need to report the distribution.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
If it was a non qualified distribution, you will have to pay tax and the 10% penalty on one third (1000 / 3000) of the earnings (box 2 of the 1099-Q) portion of the distribution. TT can handle this. The TurboTax (TT) 1099-Q interview will ask if you rolled over any of the money to another 529 plan. Answer yes. Redepositing the money counts as a rollover.