My son’s college Fall 2021 and Spring 2022 expenses were paid with disbursements in July and December 2021 from a New York State 529 account owned by his grandparents and another New York State 529 account owned by me (parent), plus cash (parent) and loans (student). Before the Spring 2022 semester started, he dropped out and the college is reimbursing him the full amount for the semester.
Fall 2021-Spring 2022 expenses (rounded $):
$50,000 – $30,000 Tuition and qualified expenses less scholarships
$10,000 On-campus housing-no meal plan
$2,000 Laptop and textbook
Paid:
$15,000 + $5,000 grandparent 529 direct to college Fall 2021 and Spring 2022
$9,000 parent 529 direct to college Spring 2022
$3,000 loans and cash
Refunded in 2022
$25,000 - $15,000 Tuition and qualified expenses less scholarships
$5,000 On-campus housing-no meal plan
If I understand correctly, I can re-contribute the refunded amount to the parent 529 of which he is still the same beneficiary (the grandparent 529 account was closed with the December disbursement) and the earnings portion of the refunded distribution will not be subject to federal tax or penalties.
However, the paragraph in the 529 disclosure booklet states that the earnings portion of the refunded distribution is subject to New York State tax.
“If you withdraw funds and then later recontribute those
funds into an Account, including a Refunded Distribution,
the withdrawal will be treated as a New York Nonqualified
Withdrawal without regard to whether the withdrawal and
recontribution result in income for federal tax purposes.
This means that the amount withdrawn will be included in
your New York State gross income and is subject to
recapture for amounts previously deducted from your New
York State personal income tax”
Who is “you” in that statement? Since the original disbursements were made directly from the two 529 accounts to the college, the resulting 1099-Q forms are in my son’s name and SSN, so will the portion of the NY non-qualified withdrawal be included in his New York State income?
Will this create a taxable event for the grandparents? Their 529 contributions (and subsequent deductions) were made in prior years.
For my own TTax state return, should I not deduct the $9,000 529 parent contribution since it was made and disbursed in 2021?
