This is still not making sense to me.
1. Let's say I receive $600 in HEERF funds, deposited in our bank account.
2. School bills me for $2600 tuition and I have $3000 in room and board (all 100% qualified expenses) for a total of $5600 and I pay for them from my bank account.
3. How much can I withdraw tax-free from our 529 as reimbursement?
A) Can I withdraw only $5,000? (reduced $600 by the amount of HEERF)
B) Can I withdraw the full $5,600? (the HEERF is independent of the 529)
Has the IRS provided an authoritative answer to these questions? It looks like they've addressed the American Opportunity Credit and Tuition Tax Deductions, but they've said nothing about 529 distributions.
Considerations:
1. HEERF grants appear to have no strict rules on their use; for example, it looks like they could be used for expenses that would be considered non-qualified for 529 purposes. The IRS describes these grants as: "emergency financial aid grants to students for expenses related to the disruption of campus operations due to the COVID-19 pandemic (including eligible expenses under a student's cost of attendance, such as food, housing, course materials, technology, health care, and child care)."
* Notice that the wording doesn't limit what the qualified expenses are. The key word to note is "including," which also seems to imply "not limited to."
* There's no requirement for record-keeping and no provision for refunding grant money back to the government if it's not spent on "qualified expenses."
2. After I deposit funds in my bank account and pay my bills, who's to say which dollar paid for a particular expense?
These considerations suggest to me that HEERF grants are independent from 529 plans, and should not affect the amount of qualified 529 withdrawal. I hope that's the case.
