Refund of Tuition creating 529 non-qualified distribution issue

Forum|Forum|4 years ago
May 6, 2021
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In June 2020, we received a refund of $6000, about half my daughters tuition expenses for that semester, due to a medical leave. I made the mistake of not depositing the funds back into her NY 529 account. While the original $13,000 tuition fees were a qualified distribution made directly to the University, now I understand I will need to show the earnings portion of the $6000 refund as taxable. From the 529 site I am able to calculate the prorate portion -- about $3000 in earnings. I do not have a 1099-Q that will show these amounts, since that would be based on the full semester tuition of $13,000. Would this be correct -- $3000 added to taxable income? How do I input this into TurboTax? What about the 10% penalty? The check was made in my daughter's name. Would this be her taxable income then?

AmyC

Employee

Maybe. Let's get this all straight. 529 distribution for $13,000 and tuition refund of $6,000. If those are the only numbers, then we are missing room and board, school supplies, etc.

A 529 distribution is not taxable when spent on qualified expenses. The extra $6,000 may have gone towards qualified expenses. If living at home, a good portion of it would still count for room and board. See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.

If you actually have taxable income and earnings, the program will calculate it after you take out everything. The name on the 529 can be the one to bear the brunt. The first$12,400 of income is not taxed so a student usually does best to claim 529 income that is in excess of expenditures.

However, you do not need to enter the 1099-Q at all if all of the distribution is not taxable.

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GregoryJKAuthor

Thank you for your helpful reply.

First, the $13k included all college expenses - tuition, R & B. It was our portion after the financial aid package.

Second, it was qualified, however, the refund was the result of my daughter dropping out half way through the semester. Thus, actual expense was pro rated for the time in school and was only half the amount. It was not an extra expense.

So it sounds like since my daughter is the beneficiary and the reimbursement came to her, she could claim it for her taxes. Since she had no other income in 2020, other than this $3000 in investment income, she would not even have to file taxes. Is that correct?