Is the distribution from 529plans considered your income?

[JohnW15 · Accepted solution]

A Section 529 distribution, or some portion of it, can be considered as income, but it depends.

If a Section 529 distribution exceeds the amount of a student’s qualifying expenses, the amount of the excess must be reported as taxable income on your return. 

If the distribution amount doesn’t exceed the student's qualifying expenses, none of the distribution is reportable as income. 

For more information, please see “Qualified Tuition Program” on page 50 of the IRS’ Publication 970, Tax Benefits for Education, and TurboTax’s article "What is IRS Form 1099Q?". 

[Debusan]

I have a follow up question on this.

We used 529 distributed to our child (who is a student beneficiary) to pay for one semester.

After payment, our child received some scholarship, which was refunded to him. This scholarship becomes our child's income, meaning it will be taxed at our child's tax bracket.

My question is if the scholarship amount is taxed as his income, can our child deposit this amount in his IRA? Note: he didn't have any job related income in tax year 2019.

[xmasbaby0]

No --the money put in an IRA has to be obtained from working.  Scholarship money did not come from working or earning the money.

[Debusan]

Thank you for the reply and clarification.