529 withdrawal for k-12

Forum|Forum|2 years ago
July 6, 2023
1 reply
0 views

Hi everyone. My parents, who currently live in Florida, contributed to a Virginia 529 plan, with my daughter listed as beneficiary. She just graduated HS & I realized too late that I couldv'e used some of the 529 funds to pay for k-12. Her HS is willing to work with me. I have 2 questions pls:

1) Her HS's willing to allow me to pay unpaid tuition w/ 529 funds. Based on my research, it seems I can only use funds for the months of school that she attended during the current tax year (January 2023) but not previous years. Is this accurate?

2) It seems that Virginia doesn't tax 529 withdrawals for k-12 up to $10k per beneficiary per year. And my parents live in Florida, which doesn't have personal income tax. However, my daughter went to school in NY. My understanding is that it doesn't matter where she went to school, my parents would not be taxed or penalized for the withdrawals. Is that correct?

Thanks!

TurboTax Online

Hal_Al

Employee

Q. It seems I can only use funds for the months of school that she attended during the current tax year (January 2023) but not previous years. Is this accurate?

A. Yes. The withdrawal ("distribution") must be in the same calendar year that the tuition was for and was paid*. But the distribution can be received after the tuition was actually paid. For example, if the tuition was paid, in January 2023, for the 1st term on 2023, the grandparents can take the distribution any time in 2023. But, if the payment (for the 1st term of 2023) was made in December 2022, they may not use a 2023 distribution for reimbursement.

Q. My understanding is that it doesn't matter where she went to school, my parents would not be taxed or penalized for the withdrawals. Is that correct?

A. Yes.

The $10k per beneficiary, per year, limit for K-12 education applies to federal income tax as well.

You say "Her HS is willing to work with me".

For 529 plans, there is an “owner” (usually the parent, but in this case the grandparent), and a “beneficiary”. 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. Alternatively, the recipient can just not report the 1099-Q, at all, if your student has sufficient K-12 tuition, to cover the distribution (up to the $10K limit). Since the distribution is a qualified (non taxable) distribution, it really doesn't matter who the recipient is.

*There is one exception to the the matching year payment rule. You may pay for the first term of 2023 in 2022 and that will be a qualified payment. But the 529 distribution must still match. That is, if you made the payment in 2022 (even of the 1st term of 2023), you must take the distribution in 2022, for it to be qualified. The reverse is not true (you may not wait until 2023 to pay the 2022 tuition and claim it as a qualified distribution).

GottaPayMyTaxesAuthor

Thanks! Re #1, what if we paid for 2022 tuition in 2023, can a 529 distribution be taken in 2023 to pay for that (would it be considered a qualified distribution)?

Re #2, the 529 fund administrator stated that because the distribution is being sent to a k-12 school, they will issue the 1099-Q to my mom who is the owner and tag the distribution on the form as 'Other.' So I assume that she will need to declare it on her IRS tax form and be able to support the validity of the distribution using the school tuition bill as supporting evidence. Is that assumption correct?

Is there any concern this could trigger an IRS audit?

Hal_Al

Employee

Q. What if we paid for 2022 tuition in 2023, can a 529 distribution be taken in 2023 to pay for that (would it be considered a qualified distribution)?

A. No. 2022 tuition must be paid in 2022 and the distribution taken in 2022 to be considered a qualified distribution.

Q. Re #2, the 529 fund administrator stated that because the distribution is being sent to a k-12 school, they will issue the 1099-Q to my mom who is the owner and tag the distribution on the form as 'Other.' Is this correct?

A. I'm not aware of an exception to the "who is the recipient" rule for K-12. But, that probably doesn't matter. The bigger is issue is the year.

Q. So I assume that she will need to declare it on her IRS tax form and be able to support the validity of the distribution using the school tuition bill as supporting evidence. Is that assumption correct?

A. If it is a qualified distribution, there is nothing for the grandparents to report on their tax return. . 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.

If it is not a qualified distribution (the distribution was in the wrong year), then the parents would not enter any qualified expenses, in TurboTax (TT) and TT would calculate the entire box 2 (of the 1099-Q), as taxable.

Q. Is there any concern this could trigger an IRS audit?

A. Yes, but no more than anyone else getting a 1099-Q. When a 1099-Q is for a qualified distribution, there is no IRS form sent with your tax return to document it. You do not include a copy of the school tuition bill with the tax return.