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GregoryJK
Returning Member

Refund of Tuition creating 529 non-qualified distribution issue

In June 2020, we received a refund of $6000, about half my daughters tuition expenses for that semester, due to a medical leave. I made the mistake of not depositing the funds back into her NY 529 account. While the original $13,000 tuition fees were a qualified distribution made directly to the University, now I understand I will need to show the earnings portion of the $6000 refund as taxable. From the 529 site I am able to calculate the prorate portion -- about $3000 in earnings. I do not have a 1099-Q that will show these amounts, since that would be based on the full semester tuition of $13,000. Would this be correct -- $3000 added to taxable income? How do I input this into TurboTax? What about the 10% penalty? The check was made in my daughter's name. Would this be her taxable income then?

4 Replies
AmyC
Expert Alumni

Refund of Tuition creating 529 non-qualified distribution issue

Maybe. Let's get this all straight. 529 distribution for $13,000 and tuition refund of $6,000. If those are the only numbers, then we are missing room and board, school supplies, etc.

 

A 529 distribution is not taxable when spent on qualified expenses. The extra $6,000 may have gone towards qualified expenses. If living at home, a good portion of it would still count for room and board. See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.

 

If you actually have taxable income and earnings, the program will calculate it after you take out everything. The name on the 529 can be the one to bear the brunt. The first$12,400 of income is not taxed so a student usually does best to claim 529 income that is in excess of expenditures.

 

However, you do not need to enter the 1099-Q at all if all of the distribution is not taxable.

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GregoryJK
Returning Member

Refund of Tuition creating 529 non-qualified distribution issue

Thank you for your helpful reply.

First, the $13k included all college expenses - tuition, R & B. It was our portion after the financial aid package.

Second, it was qualified, however, the refund was the result of my daughter dropping out half way through the semester. Thus, actual expense was pro rated for the time in school and was only half the amount. It was not an extra expense.

So it sounds like since my daughter is the beneficiary and the reimbursement came to her, she could claim it for her taxes. Since she had no other income in 2020, other than this $3000 in investment income, she would not even have to file taxes. Is that correct?

Revchap7
Returning Member

Refund of Tuition creating 529 non-qualified distribution issue

I think your response is helpful.  Please confirm my interpretation.  Due to COVID, my daughter got sent home from school and attended school on-line second semester 2020.  So, can the extra funds that I initially deducted for College from the 529, be used for room and board?  I am having hard time trying to figure out how to report the 1100 on my taxes using the Turbo Tax.  Also,  is it necessary to report it? 

 

She is still attending college and funds are consistently used in 2021.  I am just taking it out as needed as I am not sure if COVID will result in her being sent home again.  

AmyC
Expert Alumni

Refund of Tuition creating 529 non-qualified distribution issue

@GregoryJK You are doing Kiddie tax on your return for the investment income then a separate return would not be necessary since below the threshold. See:

 

@Revchap7 Room and board costs do exist to an extent at home. There is still some food expenditure and internet expenses along with any other school needed supplies. If it is only $1,100, that could be covered by the internet and food alone.  Do document in your notes why you did not claim, in case you are asked. See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.

 

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