meyersml
Returning Member

How do I account for getting 529 distributions in 2018, but paying the university in 2019?

I took funds out of my 529 account in August 2018 for fall semester and paid the university that same month. I then took out more 529 funds in December of 2018 but did not pay the university until January 2019. How do I account for this in my tax return since my 1098-T does not contain the January payment?

Carl
Level 15

Education

"I took funds out of my 529 account in August 2018 for fall semester and paid the university that same month."

That's not an issue for your 2018 taxes. Provided the money was used to pay qualified education expenses, that "cancels out" the taxability of that withdrawal.

"I then took out more 529 funds in December of 2018 but did not pay the university until January 2019. "

That could be a problem. However, 529 funds can also be used to pay for room and board, provided that room and board was in direct support of the education. So do you have room and board expenses that you paid in 2018, that you can claim against all 529 funds that were not used to pay qualified education expenses with? If so, then your issue is now a non-issue.

meyersml
Returning Member

Education

Yes, there are room & board payments, however it appears that my 2018 1098-T included room/board in Box 1.  This is different from my 2017 1098-T where room/board was NOT included in the box (which was Box 2 that year). So my concern is that even though all my 529 withdrawals in 2018 were for qualified educational expenses, the 1098-T doesn't even come close to matching up with the 1099-Q since I paid the university in 2019 rather than 2018.  And if I can made adjustments to the number in box 1 of the 1098-T, where do I do this in Turbo Tax?
Carl
Level 15

Education

Bear with me while I "back track" a bit here to help you understand.
 - Qualified education expenses are claimed in the tax year they are actually paid. it does not matter what year is paid "for".
 - All scholarships, grants, and 529 funds are claimed as taxable income "INITIALLY" in the tax year they are received. It does not matter what year that money was received "for".
The taxability of all scholarships, grants and 529 funds are offset by the qualified expenses they were used to pay "for" in the same tax year those  monies were received.
So in your specific case, you will pay taxes on the 529 funds you withdrew in 2018, but did not use for qualified expenses "in 2018". That money is now your "pocket money" and you're gonna pay taxes on it.
Now, if congress ever renews the deductibility of money paid out of your pocket for qualified education expenses, then you'll be able to deduct it on your 2019 taxes next year. So that would in essence, "offset" the taxes that you will pay on that money with your 2018 tax return.  Now for the possible issues if congress does not renew the "out of pocket" deduction.
The only "qualified education expenses" are tuition, books, and lab fees. That's it, with no exceptions. But the category of "lab fees" is rather broad.
- Scholarships and grants can only be used to pay for the above three qualified education expenses. That's it.
- 529 funds can be used to pay for the above three qualified education expenses, "and" to pay for room and board, *provided* that room and board paid for with those 529 funds was in direct support of the education. (So if you were not enrolled for the summer semester, the room and board paid for those months is just flat out not deduction at all.)

Now your possible issue for 2019, is that since those withdrawn 529 funds you got in 2018 are considered "pocket money" in 2019, if congress does not renew the deductibility of qualified "out of pocket" expenses, then you're just plain outta luck.

Now on the "room and board" category many make the mistake of not realizing that includes more than just what you pay for rent. The "room" part  also includes your utilities such as electric, water, gas, and Internet. (Nowadays, Internet access at home is "required" in order for you to do the work necessary of many college collage classes. So it counts as a utility.)
Now the "board" part of room and board is what you pay for food. Hey, you gotta eat, especially when attending college far from home where you can't go home to mom's house to eat 3 times a day, right?  But be forwarned on what you claim for these costs.
Basically, if you are not living in campus provided housing, then what you claim for the "room" part can not be more than what you would pay if you lived in campus housing. The exception to this is if you have a letter from the college informing you that campus provided housing is not available, and you have no choice but to obtain other off-campus housing. If you have such a letter, then what you claim for the "room" part can exceed the campus housing costs, so long as it's "reasonable" for the location you're in. So don't think you can get away with claiming rent for the penthouse suite at Trump Towers for $10K a month while attending NYU. There's no way that's "reasonable" for a college student.
On the "board" or food costs, almost all colleges offer a food plan. Generally, what you claim there can't be more than what the college charges for their food plan each semester. The exception to that would be if you have the letter I mentioned above, informing you on-campus housing was not available. But even if you do have such a letter, then your cost must be reasonable for the location. No steak and eggs for breakfast everyday, with steak and lobster for lunch every day. No way the IRS will buy into that for a college student.
Now I told you all that about 529 funds in case it's possible for you to apply your 2018 529 withdrawal to any such allowed room and board expenses that were actually paid in 2018. As it stands now., that's the only way I see that you can avoid or at least reduce the taxable amount of the 529 funds you withdrew in 2018.
meyersml
Returning Member

Education

You more than answered my question - lots to digest. Bottom line is I should have taken 529 distributions and paid college tuition during the same year. Even though the events only were 1 week apart, they were in separate tax years. I know for next time.
Carl
Level 15

Education

Since the spring semester always starts in Jan each year, I always recommend all expenses for the following spring semester be paid before the end of the preceding fall semester. Remember, colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. Since credits such as the American Opportunity Credit can only be claimed a maximum of 4 calendar years, you want to pay that senior year spring semester before the end of the senior year fall semester so you can take full advantage of things like the AOC in that 4th calendar year.