How to deal with end of year 529 distribution that didn't go thru until Jan 2, 2018?

[Bigfoot100]

Hello - We have a 529 plan for our child who just started attending college in the fall of 2017.  I tallied up his qualified expenses at the end of December 2017 and submitted a request for a distribution for that amount.  However, due to the fact that it was our first withdrawal from this account, it took a couple of extra days to process and the transaction ended up being executed on January 2 of 2018.  So, I did not receive a 2017 1099-Q for the amount withdrawn, even though the amount was attributable to 2017 expenses.

Should I just let this go and attribute the above expenses to 2018 when I do the 2018 taxes?  Or... something else?  Just in case this affects the answer, we cannot take advantage of any other educational tax credits.

Thanks!

[CarolC · Accepted solution]

Wait until you complete your 2018 tax return to report the 529 Plan distribution received in 2018.  Keep records of your expenses that align with each distribution from the plan.

From your last statement, it sounds like the 529 Plan covered all of your dependent's education expenses.  As long as the earnings and basis of the amount withdrawn were used for qualified education expenses, the distribution is tax-free.

See this TurboTax article Information on 529 Plans for additional details.

Note:  529 Plans are very liberal in what qualifies as an education expense.  Room and board qualify too.  

[Bigfoot100]

Thank you!

[Shasta]

Last year I totaled up 2018’s expenses.  Submitted to 529 plan at end of December 2018. Just saw as I was about to submit 2019’s expenses for reimbursement that 2018’s request was paid out 1/2/2019 per the 529 plan’s record.  I don’t want to lose pulling untaxed a full year’s worth of expenses from the 529 plan.  I suspect the 529 plan will send a 1099Q reflecting 2019’s distributions to include the 1/2/2019 distribution.  How can I make sure the IRS aligns the December 2018 distribution request as matching up with 2018’s expenses not 2019’s? 

[sandbpa]

I have the same issue; I requested disbursement prior to year end and got a disbursement on Jan 2.  How does IRS deal with prior year disbursements that get paid on the next year?  In our case, the disbursement doesn't make sense the following year because student took time off to go and work rather than continue school.  Additionally, our Virginia 529 plan has specifics to say that we have until March 31 the following year to claim disbursement for qualified education costs during the prior year.  However the turbotax software does not account for that.  It's specific to the year the disbursement is made.  This little error is costing $2K in tax returns (with unqualified disbursement and 10% penalty costs).

[AmyC]

@sandbpa

2019 disbursement received in 2020 but student chose not to go to school in 2020.

The IRS says in Publication 970 (2020), Tax Benefits for Education | IRS: When figuring an education credit or tuition and fees deduction, use only the amounts you paid and are deemed to have paid during the tax year for qualified education expenses.

If the 2019 disbursement went to pay 2019 expenses, it would be on the 2019 return. If it paid 2020, it would go on 2020 return. You have the bursar account and paperwork trail for proof either way.

VA understands colleges frequently charge tuition or scholarships that don't match up. This allows for the variance. Which goes along with the deemed to have paid with the IRS above.

For simplicity, keeping federal and state education expenses aligned is great. If you want to go off-path, you would need to file the federal, save a copy of your federal return, then adjust the amounts and file the state.