529 withdrawals write off against grants and scholarships

Forum|Forum|2 years ago
January 24, 2024
1 reply
0 views

Morning,

Here is the situation.

We had/have 529 money. Over the course of 4 years we withdrew 529 money to cover any delta between expenses and scholarships/ grants.

She has graduated.

We did not withdraw money to equal scholarships/grants.

Now here we sit with $75,000 of unused 529 funds and we want to withdraw it for her to use as a downpayment on a house. We uderstand the tax on the earned amount the question is can I still write off 529 money because of the $100,000 she received in scholarships that we never wrote it off against to avoid the 10% penalty, I have seen different opinions as well as comments that there is a way to do this on turbo tax

TurboTax Home & Biz Windows

Best answer by Hal_Al

It takes a workaround. Do not enter under income. Instead, in TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

-Deductions & Credits

-Scroll down to:

--Education

--ESA and 529 Qualified Tuition Programs (1099-Q)

When asked who is the student, check "someone not listed here" (even if she is still your dependent). On the next screen, enter the real student's name. This will eventually give you one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there.

Check that she attended college in 2023 (Lying to TurboTax to get it to do what you want does not constitute lying to the IRS).

Enter your expenses, covered by scholarships, over the years (and not previously used to claim other tax breaks).

Re-enter the total in the box "Tax-free assistance" under adjustments (the scholarships amount).

TT will prepare form 5329 to claim the penalty exception.

With this workaround, You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. You get one simple screen to enter everything.

I have not addressed the issue of whether you are allowed to claim the scholarship exception, this late. The consensus is that you are not. But, it's not unanimous. Here's one reference that says you are allowed to: https://www.forbes.com/sites/josephhurley/2016/02/04/dont-make-these-mistakes-when-reporting-529-plan-withdrawals/#643c9dc26155

Hal_AlAnswer

Employee