Refund of Qualified Expense repayment to 529 plan

[M84]

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!!

[Hal_Al]

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.

[M84]

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,

[Hal_Al]

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

[M84]

Thank you......very helpful

[ashubuta40]

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.?

[Hal_Al]

@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.