topic Non-qualified 529 withdrawal calc for Pennsylvania in State tax filing

Non-qualified 529 withdrawal calc for Pennsylvania

jomikemu — Thu, 27 Feb 2025 21:03:57 GMT

My son is filing independently this year for Fed/PA. We (parents) are the owners of his 529 and made contributions from 2007 thru 2023. He had 20K of fully qualified withdrawals in 2023. He took a withdrawal of 50K in 2024 which 10K of it was for educational expenses and the rest was unqualified. Basis/Earnings is approximately 40/60 (and using rounded numbers for simplicity).

Seems to me that the remainder of 40K should ALL be taxable income to him in PA but the questions in TT are confusing me and ultimately indicating that only 15K is taxable. Is this right?? Should the contributions question be zero - given that we made them, not him? (Even so, they were all deducted on our PA returns over the years so I would still think the whole 40k would be taxable. ) Appreciate any guidance you could give me here.

Total 2024 Distributions	50,000	A	Reported on son's return (beneficiary)
Qualified Amount	10,000	B	Reported on 1098-T for son's return
Total Contributions (all before 2024)	40,000	C	Contribs made by PARENTS
Excess 2024 Contribs	-	D	n/a
2023 Distributions	15,000	E	Distribs made to beneficiary
Adjusted Basis (C+D-E)	25,000	F
Penna Taxable Amount (A-B-F)	15,000	G

Re: Non-qualified 529 withdrawal calc for Pennsylvania

KrisD15 — Fri, 28 Feb 2025 00:34:10 GMT

You don't provide all the information I need to make a complete calculation, but even with saying the earnings/basis is about 40/60 means the 40,000 would be around 16,000 taxable. (but there is a little more to it)

Only the earnings are taxed, not the return of the basis.

The calculation can be found on Pages 45 & 46 of Pub 970 as well on Worksheet 6-3 on page 49.

Re: Non-qualified 529 withdrawal calc for Pennsylvania

jomikemu — Fri, 28 Feb 2025 18:42:07 GMT

This is specifically for Pennsylvania where, I believe, then entire non-qualified portion of the distribution would be taxed, not just the earnings (since PA allows the contributions to be deducted). Out of the 40K non-qual portion though - basis is approx 16K and earnings are 24K. For Fed, it makes sense - the 24K (with some additional allocation differences) is taxed & penalized. But the PA calc doesn't make a lot of sense to me.

Re: Non-qualified 529 withdrawal calc for Pennsylvania

AmyC — Fri, 28 Feb 2025 22:12:15 GMT

Yes, contributions after 2006 is the dividing line. If all contributions were after 2006, then all claimed deductions become taxable. It is a bit messy with years and claiming all to be figured out.

Take a look at your PA sch A.

PA DOR states: Distributions from an IRC Section 529 College Career and Savings Program Account not used for qualified educational expenses are taxable and reportable as interest income on PA Schedule A and Line 2 of form PA-40. The cost recovery method must be used to determine the taxable amount for contributions made in tax years 2005 and earlier. The total amount of distributions that were claimed as deductions for tax years 2006 and later is taxable.