Did You Take a Distribution From Your 529 Plan During 2020?
Did you take a distribution from your 529 Plan during 2020?
If you withdrew from a 529 plan, and subsequently received a refund for the tuition paid, you may be in for a surprise when you file your tax return. There are various ways you could have used those funds to avoid potential tax and penalty. If you took the necessary measures to avoid this, it is important to keep the appropriate documentation for at least three years. Tax preparers will need to see that the money refunded to you was used for qualified education expenses or re-deposited. To make your tax filing go as smoothly as possible, here is what you need to know.
Vouchers, Credits, or Coupon Refunds
Many educational institutions are sending out refunds in the form of a voucher, credit, or coupon that can be used for future college expenses. This kind of refund does not yield a cash payment and consequently cannot be recontributed to a 529 plan. Since this is not a true refund, it will not cause the 529 plan distribution to become non-qualified. So, what should you do if you receive one of these “coupon” refunds? In short, nothing. Given that the refund is not cash, it cannot be recontributed to a college savings plan and therefore is not taxable.
Tax Form 1099-Q
When you take a distribution from your 529 plan, you will receive form 1099-Q at the beginning of the upcoming tax season. That 1099-Q form shows your annual distributions from the 529 plan in Box 1 and reports the portion of the distribution that represents account earnings in Box 2. If annual distributions exceed your qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10% penalty. Tax preparers will compare the amount of the distribution in Box 1 to how much you spent on qualified education expenses.
Qualified Education Expenses include
Tuition and fees, books, supplies, computers and peripheral equipment, room and board (if attending school more than half-time), and for special needs beneficiaries, expenses for special needs services incurred in connection with enrollment or attendance. In participating states, tuition expenses up to $10,000 per year per beneficiary are considered qualified for an elementary or secondary public, private or religious school.
What you need to know
If the amount of the distribution you took from your 529 plan is less than how much you spent on qualified education expenses, you will not be subject to income taxes or the 10% penalty on any of the earnings reported in Box 2.
If you did not spend your entire distribution on qualified educational expenses, possibly because your educational institution issued you a refund, the excess can be re-contributed to the 529 plan within 60 days of receipt. The earnings on any excess that was not re-contributed within 60 days of receipt will be subject to tax and penalty.
The Burden of Proof
The burden of proof is the responsibility of the account owner. Your 1099-Q will not reflect re-contributed funds to your 529 plan. If you re-contributed those funds, make sure you have the paper trail to back it up. Be sure to provide your tax preparers with forms 1099-Q and 1098-T, as well as any other documentation you have.
For further assistance with this, MMNT is here for you. You can reach us by calling 860-643-1001 or by filling out your information to the right of this blog posting.