Can i get a deduction or credit for using 529 distribution to pay my child's student loans?

Forum|Forum|2 years ago
February 3, 2024
1 reply
0 views

I thought that I read that I could now use 529 funds to pay for student loans. I am the owner of the account for my son. I took a distribution and used it to pay off his student loan.

TurboTax Deluxe Online

Hal_Al

Employee

Yes, a 529 distribution can be used to pay off a student loan. It is neither a deduction or a credit. It is simply that the distribution will not be taxed or penalized.

There is a lifetime limit of $10,000 from a 529 plan that can be used without any penalties or tax consequences to repay the beneficiary's student loans, including federal and most private loans. An additional $10,000 can be used to repay student loans held by each of the beneficiary's siblings.

If you withdrew $10,000 or less, you do not even need to report the distribution. That is, you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including student loan payments. 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. !

References:

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."

IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

sarpal

Employee

Just wanted to clarify. My son took the student loan in 2021 & 2022 but I paid it off now in 2023. I received a 1099Q in my Name with Box 6 checked (for the Recipient is not eh designated beneficiary). The amount is under $10k. Do I need to enter 1099Q in my or my son's 2023 tax return? If I do, what do I enter for corresponding Education Expenses as the education expense was incurred in 2021 & 2022 when he took the loan to pay off tuition (not in 2023) when I paid it off using 529 distribution (for which I am the account owner, and my son is the beneficiary). I want to understand how to report it accurately in my 2023 tax return. Thanks for answering the original question as well as this follow-up.

Hal_Al

Employee

Q. Do I need to enter 1099Q in my or my son's 2023 tax return?

A. No, because this was a qualified distribution for the reasons explained above

Q. If I do, what do I enter for corresponding Education Expenses as the education expense was incurred in 2021 & 2022 when he took the loan to pay off tuition (not in 2023) when I paid it off using 529 distribution?

A. You enter no education expenses, per se. You will encounter an interview question that asks if you used the money to pay off a loan in 2023. Answer yes. The act of paying the loan, in 2023, is the "educational expense" that makes the the 2023 distribution tax free ("qualified"). It doesn't matter that the actual expenses were in earlier years.