Education

I'm confident you already know much of the below. But I'll state it anyway for clarity since 2020 is your son's first year in college.

The Florida Bright Futures is a scholarship. It can only be applied to the "qualified" education expenses of tuition, books, and lab fees. That's it, with no exceptions. (Though the category of "lab fees" is rather broad).

If, after paying those qualified expenses from the Bright Futures scholarship, there is anything left over, that left over amount is taxable income to the student.

The Florida Prepaid is basically a Coverdell/529 plan. These funds can be used tax-free for the qualified education expenses mentioned above, and also for the cost of room and board. But there are limitations that many fail to realize on the room and board part. I'll cover that later.

When the school receives money on behalf of a student, it gets applied in a specific order and we have no say on that.

First, scholarships are applied to the qualified education expenses of tuition, books and lab fees. If there is any excess, then that excess is reportable (and possibly taxable) income to the student - not the parent.

Second, 529 funds are applied to any remaining qualified education expenses, and can also be applied/used for the cost of room and board *provided* that room and board is in direct support of the education.

Lastly, if there are still qualified education expenses to be paid, then "out of pocket" money is used last. That could be money out of anyone's pocket, including the parents, the student, grandma, or anyone else. That "out of pocket" money is basically money that has already been taxed in some way. If used for the qualified eduction expenses of tuition, books and lab fees then that money will be "un" taxed and any taxes withheld on it will be credited or refunded.

In your specific case sicne the student qualifies as your dependent (and assuming you actually claim them as your dependent) the credit for out of pocket expenses is taken by you the parent, and it does not matter who actually paid those expenses. Now on to the "room and board" part as it applies to 529 funds.

529 funds must be used in the same tax year they are withdrawn. Period. If they are not, then the withdrawal is a taxable event. Period. When it comes to using 529 funds to pay for room and board, that room and board must be "in direct support" of the education, and in some situations the amount you can claim can be limited too.

Now there are two parts to this. First there's the "room" which is the cost of having a place to sleep.  Then there's the "board" which is basically the cost of food.

The "room" part includes rent, utilities and any maintenance expenses (which are not common for an undergraduate) incurred to maintain the facilities. If the student is living on campus, then the monthly rent they pay for that already includes utilities and maintenance costs and is a totally tax exempt expense.

The "board" part is for food. I already know that UF offers a food plan. (Actually 3 food plans of different costs, depending on the need.) What you pay each semester from the 529 funds for that food plan is not taxable income. Now lets move to a student that lives off campus.

If the student is renting off campus housing, that too is a deductible expense when paid with 529 funds. However, what you claim against the 529 funds can not exceed what it would cost the student to live on campus. The one exception is if the student received a letter informing them that on campus housing was not availalbe and they have no choice but to seek housing off campus. In such a case it's no problem to claim the full cost of rent and utilities for the off campus housing. Just keep in mind that the costs must be reasonable for the area. In other words, no $5000 a month penthouse suites. That's not gonna fly with the IRS for an undergraduate.

If the student is living off campus by choice (and not because on campus housing is not available) then what they claim for food (the "board" part) can not exceed what it would cost them for the on campus meal plan. But if living off campus because on campus housing is not available, then no problem with the cost of food. But again, those costs are expected to be reasonable. In other words, steak and eggs for breakfast with lobster for lunch and dinner every day are just not going to cut it with the IRS.

Basically, if you don't have any qualified out of pocket expenses (room and board does not qualify) then you have no claim to any of the education credits. There are some loopholes you "may" be able to work. But in the end it all "works out in the wash" and what you may gain now, will just be lost later.  A few things to keep in mind during your son's school years:

- Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes 5 calendar years to get that four year degree.

 - Scholarships, grants and 529 distributions are reported as taxable income (initially) in the tax year they are received. It *does* *not* *matter* what tax year that income may be "for".

 - Qualified eduction expenses are reported as such in the tax year they are paid. It *does* *not* *matter* what year is paid *for*.

I point this out, because many of the education credits can only be taken for four calendar years, and that's it. So you may find it in your best financial interest to pay for the last semester of the senior year (which will start in the 5th calendar year of school) before the end of the first semester of the senior year. That way, if you have out of pocket expenses when you pay for that final semester, you can claim all the education credits you qualify for with no worries about having claimed it four times already.

Finally, if the total of all scholarships, grants and 529 distributions received in 2020, exceed the total of all qualified education expenses paid in 2020, then while you will still claim the student as your dependent, it is the student (not the parent) that will report all the education stuff on the student's own return, provided the student meets the criteria that requires them to file a return.