College refund: 60 day window to redeposit into 529 account

[main0stage]

I got the refund in early 2020 but i was not aware of the 60 day window in which i have to deposit it back to 529 account or pay penalty as non-qualified distribution.

Here is my argument however, since i continued to pay more fee in 2020, more than the refund amount, so do i really have to 'term' this as a refund?  

[ColeenD3]

I'm not sure what you mean by "refund" and "fee". You report your distribution by entering your 1099-R exactly as it appears. If you did not meet the 60 day deadline, it is taxable.

[main0stage]

pardon me for not being clear. I paid the college tuition/room fee way ahead in the year. 2020 Spring tuition/board fees were paid in 2019. However, March 2020 we got the refund for room board since colleges closed to covid. This refunded amount should go back to 529 account within 60 days. But, i continue to pay fee  after March 2020 for Summer tuition etc.

Hence my question, did i really have to re-contribute? All expenses are qualified and when i withdraw from 529, i dont specifically state if i am withdrawing for room or tuition etc. (yes it is on campus room/dining which is qualified expense)

thank you

[KrisD15]

I think what you are asking is if the 529 distribution must be reported as used for what you originally took it for. 

NO.

Expenses can be manipulated however best fits your situation. If the room and board fee was refunded, and that was paid for with the distribution, but you paid other fees, allocate the distribution to those other fees if that works out better for you. 

IRS Pub 970

[main0stage]

kris- thank you for explaining in simple english. That is exactly my dilemma... here are two additional factors that complicate this situation.

i) Turbotax asks, did you receive refund? Should i answer as NO? If i answer YES, then it takes me to next step whether i deposited it back in 60 days.

ii) Secondly, does the UNIV report to IRS that they refunded the amount?

thank you

[KrisD15 · Accepted solution]

Second question first.

Everything tax related, that the school reports to the IRS, is on Form 1098-T. The IRS gets a copy of the 1098-T and you (or the student) get a copy as well. The 1098-T should report Tuition and Fees paid to the school (Box 1) as well as scholarships that the school handled for the student (Box 5). Room and Board expense, as well as room and board refunded, are not listed on the 1098-T. 

The designee of the 529 plan reports distributions on Form 1099-Q. Both you and the IRS get a copy. 

There is nothing that reports the refund of room and board expenses to the IRS. 

For your first question-

Since this all occurred in the same tax year, and since there WERE expenses to cover the distribution (whether those expenses were originally paid for by scholarships or cash) you can allocate the distribution to those costs. Don't worry about the refunded room and board amount. 

Enter the 1099-Q and select Yes, it was used for education if it could be applied to tuition, fees and/or supplies. You do not need to select that the distribution was refunded.

ALSO, as you continue through the education interview, although the student is not away at school renting, you can claim the food and other living expenses of the student even when the student is at home as room and board expenses. 

The IRS is very adaptable with the education credits. They don't want it abused, but they encourage getting the best credit possible. It is even permissible for the student to claim scholarship (or distributions) as income if it allows a better credit for the parents 

From your description, you are not doing anything underhanded by not reported the refunded room and board since the distribution was still used for education expenses. 

You might want to look at IRS Pub 970 which is pretty easy to read and gives some great examples of how to maximize the credit. 

IRS Pub 970

[daherbie]

Tip from my experience : Save receipts of every college expense and be able to prove it.  I'm in an IRS audit because i didn't file a 1099 that had no impact to my taxes and they then starting digging to the 1099-Q related to my 529 withdrawals for school expenses.   Since it was over the amount of the tuition statement they are asking for evidence of all the school expenditures and they NOT are accepting transfers I made to my daughter to pay for rent for example.  If i sent my daughter money via bank transfer or via Venmo or bank transfer with 'RENT' in the comment, that's not enough.  They want the receipt of her paying the landlord (how do they know what she did w/ that money they said).    Same for food - i had to get receipts of payments I made to a 529 approved food card program they have at their school.   I shared the schools website with their allowances for living expenses and they don't care about that.  Computer, books,etc - save receipts for everything or they don't believe it.