How do you calculate the taxable portion of interest on a 529 plan shown on 1099-Q if not all of the distribution was used for allowable college expenses?

[MinhT · Accepted solution]

The taxable portion of earnings on a 1099-Q distribution is pro-rated as follows:

Taxable earnings = Total earnings x Distribution not used for allowable expenses / Total distribtions

[mtgramabear]

I had read some place that the calculation in order to compute the penalty for withdrawing money that was not used for college expenses is: account contributions/account value x distribution = contribution portion and that the original contribution would never be penalized.  Is this calculation correct?

[MinhT]

The account contributions are never subject to tax or penalty. This is because the 529 contributions were made from after-tax dollars. Only the earnings can be subject to tax and penalty if the distributions are not used for allowable expenses.