College refund from 2022 payment.

[soodala2k]

Hello,

My daughter had a college refund on 3/15/23 and I did not know that I had to recontribute that refund to my 529 account to avoid any tax attached to it. The tax law states that people need to recontribute college refund to their 529 plan within 60 days in case the money was withdrawn from 529 plan and was paid to college. I googled up other alternatives and one of them said that I can use that money for other eligible education expenses in the same year, but my problem is that the refund is from 2022 college payment. The regulation said that I need to spend the refund in the same tax year. My question is when it says " same tax year" does it mean the year the refund is issued, or the year the original payment to the college was made? My another question is that one expert recommended that I can use to pay off the student loan. Then I do not have to pay taxes. Is that right?

This is the copy of the refund that I got on 3/15/23. I paid 2022 fall semester and 2023 spring semester with the money I withdrew from 529 account in 2022.

"Date Posted Term/Session Description Amount
N 02-Mar-23 2022 Fall Refund - Student 44,535.00
N 02-Mar-23 2023 Sprng Student Refund 44,535.00
N 02-Mar-23 2023 Sprng XXXX Univ Grant-Appeal --9,070.00"

Thanks for your help.

[Opus 17 · Accepted solution]

If the refund was paid to you in 2023, then you can offset any penalties by applying the money toward 2023 expenses (and therefore withdrawing less during 2023 for 2023 expenses). 

The year you must apply toward expenses is the year you got the refund, not the year the expense was originally from.  

[soodala2k]

Thanks a lot for the reply.

• If so, does the school reflect the refund on 2023, 1098 T? If not, they will issue a revised 2022, 1098 T form and I would face penalty and tax although I spend the refund on 2023 eligible education expenses

[Opus 17 · Accepted solution]

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@soodala2k wrote:

Thanks a lot for the reply.

• If so, does the school reflect the refund on 2023, 1098 T? If not, they will issue a revised 2022, 1098 T form and I would face penalty and tax although I spend the refund on 2023 eligible education expenses

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According to the instructions for the 1098-T form, box 1 of the 2023 form should include payments and refunds made or paid in 2023 that apply to 2023 only.  A refund paid in 2023 for a prior year would be reported in box 4.  I don't know what Turbotax does with that information.

@Hal_Al ?

[Hal_Al · Accepted solution]

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. Only if you are claiming a tuition credit, do you even need to report that you received a form 1098-T. 

You claim educational tax attributes, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. 

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS. 

TurboTax can handle your situation, but it can get a little tricky. It helps if you know what the result is supposed to be.

529 distributions can be used to pay down student loans, but there is a $10,000 (lifetime) limit. Reference: https://www.investopedia.com/articles/personal-finance/020217/can-i-pay-student-loans-my-529-plan.as...

You don't mention whether you are eligible for a tuition credit (there's an income limit).  You may want to pay a little tax on the distribution, in order to claim the credit.  See full explanation below. 

______________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.