Pennsylvania State Tax with regard to unqualified 529 distribution
In Pennsylvania contributions to a 529 prior to 2006 were taxed. Beginning in 2006, 529 contributions were not taxed.
According to the PA Dept. of Revenue website in order to figure out the taxable amount of an unqualified distribution you are to use the cost recovery method for contributions prior to 2006.
Our circumstances:
Contributions pre-$2006 $18,728
Contributions 2006-2011 $30,800
In 2011 we had a qualified distribution from our son's 529 of $15,000 (basis of $13,916.38 and earnings of $1083.62)
In 2020 we had a non qualified distribution of $8,000 to fund a Roth IRA for our son.
When I answer the required questions in Turbo Tax for the PA state taxes, it indicates that we owe no PA tax on the distribution and the interest income worksheet is as follows:
7a. Total Distributions from form 1099 Q $8,000
b. Amount used for qualified educational purposes $0
c. Contributions made in 2019 and earlier $49,528
d. Excess contributions in 2020 $0
e. Prior year distributions 2011 $15,000 2019 $0
I wasn't sure if this meant all prior years or just
the prior year (2019), so I tried both
f. Adjusted basis $34,528 $49,528
g. Taxable amount $0 $0
This does not take into account the amount of contributions that were made pre-2006 vs those 2006 and after.
So, since the $15,000 was a qualified distribution for educational purposes, does that reduce our $18,728 in pre-2006 contributions under the cost recovery method? If so, is it the entire distribution, or just the cost basis ($13,916.38) for that distribution?
Or, is it just the unqualified distributions that will reduce our cost basis in the cost recovery method?
I contacted the PA Department of Revenue customer service through their website and all they could do was refer me to their instructions and to use the cost recovery method, but they couldn't give me an explanation of what should be included/excluded in the cost recovery method.
