10% penalty for excess 529 plan distributions

Forum|Forum|7 years ago
February 22, 2019
3 replies
0 views

I would like confirmation on a point which I state informally below, by paraphrasing the more formal text of Pub.970. It has to do with a penalty of 10% of the taxable withdrawn earnings (in addition to the tax on it) that is in excess of any adjusted qualified educational expense (for 529 plans).

My informal understanding of Pub. 970 text on this issue is as follows: One can always withdraw money from a 529 plan up to the amount of a tax-free scholarship without the additional 10% penalty.

I want to know if I have correctly understood the formal language of Pub. 970.

A specific situation I face is as follows:

EXPENSES
Tuition: 57879
Books: 554
Room and Board: 15990
Total Qual. Expenses: 74423
Scholarship: 9848
Used for AOTC: 4000
ADJUSTED Qual. Expenses: 60575 (=74423-9848-4000)

529 WITHDRAWALS
Withdrawal (from 1099-Q Box 1): 70393
Earnings (from 1099-Q Box 2): 10538

Based on the above data, I have a taxable amount of 1470 on the earnings owing to a larger distribution than the qualified expenses. (Calculated as [1-60575/70393] x 10538 = 1470.)

The question is if I owe an additional 10% tax.

Based on my understanding of the rules, as stated above informally above, I think not.

Please could someone clarify if my understanding is correct.

Thanks very much in advance.

raywmlee

Level 2

I don't have an answer for you. But I have similar situation after entering all the numbers for 1099-Q and 1098-T. turbotax 2018 said there is no taxable amount for 10% penalty but there is a non-zero amount for the regular tax part. I am not sure why the two amounts can be different in my case. My college kid has no scholarship or student loan, just a college pre-paid plan that pays directly to the university for their bill. This should not be any easier situation but still there is a taxable amount from turbotax.

NCperson

Level 15

Do you have an AOC tax credit?

You can’t use the same expenses to both claim the AOC tax credit as well as cover the withdrawals from the 529... is that what is occurring?

raywmlee

Level 2

My turbo tax issue has nothing to do with AOC. I found out from other blog answers this is likely a Turbo tax programming bug. I will deal with it some other way.

970nessa

Level 2

her name geraldine

AmyC

Level 15

I would do the math differently.

Tuition: 57879
Books: 554
Room and Board: 15990
Total Qual. Expenses: 74423

529 WITHDRAWALS
Withdrawal (from 1099-Q Box 1): 70393
Earnings (from 1099-Q Box 2): 10538

1099-Q went completely to education expenses with $74,423- 70,393 = $4,030 of expenses still to be covered.

Scholarship: 9848 -$4,030 education expenses =$5,818 scholarship income to student with no AOTC. No good if you qualify for AOTC.

Since you want AOTC, student takes the $5818 above plus $4k more as income for $9,818. The first $12,400 is not taxed for the student. You get the AOTC, 1099-Q fully used, no tax, no penalty.

@dyons

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"