My oldest will start college next month, and I have 529 college savings plans.
She will live just off campus in an apartment whose rent is greater than on-campus room and board combined.
I will be making my first withdrawals from one of the plans to cover the first month's rent and some tuition/fees I already paid out of pocket that confirmed her acceptance to the University. Tuition isn't due until late August.
The withdrawal form asks if I want the check made out to me or in my daughter's name, and indicates that if made out to me will be reported under my name for tax purposes, but if made out to my daughter then will be reported under her name for tax purposes.
Does it matter? Isn't the income from any gain used for unqualified expenses applied to my daughter, even if the check is made out to me to reimburse me for her education expenses?
Next, are her qualified expenses for room and board the maximum of the University's on-campus list price, or her actual lodging and food expenses if higher? If the excess above the University's on-campus list price for room and board is unqualified expenses, then I assume the gain on the withdrawal is subject to income tax on my daughter's return according to the ratio of unqualified expense to total withdrawal. Correct? Combined with her earned income, this will probably still be under the standard deduction and she will still pay no income tax.
Yes, the taxable part of any QTP distribution belongs to the beneficiary. However, if ever audited, it can be a pain in the butt when the amount is reflected as belonging to you. Have the QTP make the check in her name.... unless of course you are fearful that she will spend the money on something else..........
Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
Page 54 of the referenced IRS Pub has the calculation for computing the taxable amount (if any) of a distribution.
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A word of caution: You have to be careful when paying for qualified expenses and you have a distribution from a QTP. Don't take a distribution in December that you won't spend until the following January! Or... don't pay tuition in December and take the distribution the following January!
From an article in the Wall Street Journal:
When Should I Withdraw? To avoid tax penalties, be sure to pay college expenses in the same calendar year that you take money out of the 529 plan. "It doesn't present a tricky issue when Junior gets in and Mom and Dad make the first payment in July and August," says John Heywood, a principal in the retail investor group at Vanguard Group. But when the second-semester bills are due in December or January, some account owners get tripped up by withdrawing from the plan at the end of one year and paying the expenses early the next year. Although the funds don't have to be distributed and paid on the same day?in theory an account owner can take money out in April and pay the bills in August?it may make sense to take money out close to the time of the payment to avoid problems. Also, if the plan administrator is writing a check directly to the school, allow several weeks of wiggle room to ensure the check clears, advises Mr. Heywood. Schools tend to process checks from parents and students immediately, but it may take longer for a check that comes directly from a 529 account, he says.
It's still not clear to me. Are off campus expenses allowed in 529? The cost is not included in the cost of attendance, nor is it actually charged by the university.
No. Typically, the amount is what the school charges for room and board if the student stayed in school housing.
Assuming there are earnings in the account, the beneficiary would have taxable income and be subject to the 10% penalty (assuming no exception).
Example: You took a distribution of $10,000 in December 2010 to pay for tuition for the next semester. $1000 of the distribution represented earnings. You paid the school $10,000 in January 2011. You did not spend the distribution on qualified expenses in 2010. You have a 2010 taxable distribution of $1000.
Wow - regarding off campus housing - that's news to me. The University accepted my daughter but did not have on-campus housing available. We were therefore forced to get an off-campus housing arrangement. I saved in a 529 plan not only for tuition, but room/board as well. I thought if off campus, I could draw on the 529 plan for off-campus housing not to exceed the on-campus housing rate, tax free/penalty free.
Are you saying that 100% of the gain from a 529 distribution drawn to cover off-campus housing, even if less than on-campus room/board, is taxable and subject to 10% penalty? What am I supposed to do, not use the 529?
If true, at least the tax is applied to my daughter's income for tax purposes, and with her small summer-job income may still be below the standard deduction.
Yet another question regarding the American Opportunity Credit:
Do I have to withdraw tuition from my QTP and pay the university both by end of December 2011 for the Spring 2012 semester if I want the tuition to apply to my 2011 American Opportunity Credit? Or, can I withdraw the tuition from my QTP in January 2012 and pay the university in January 2012, and still apply toward my 2011 credit?
P970 is not clear. It does say tuition for the first three months of the next year can apply to the credit, but does not mention if that payment has to be made in the tax year.
Each university has housing cost numbers, used for financial aid purposes, for both off-campus housing and living at home. 529 distributions are tax free up to these amounts (or actual costs, which ever is less in the case of off-campus housing).
Please refer to Page 55 of p970, "Coordination With American Opportunity and Lifetime Learning Credits". I can draw on my QTP and deduct $4000 from my AQEE to determine the taxable portion of the gain that is applied to my daughter's income, and still get the AOC. By subtracting the $4000 that applies to the AOC, this increases the taxable portion of the gain. And this is applied to my daughter's income, which will still be below the standard deduction, while I claim the entire AOC.
I would still like an answer to my question about timeframe to draw on the QTP and pay for the January 2012 tuition in order to apply to the 2011 AOC.
No. Carefully reread what I posted. If the school would have charged $10,000 for the semester in school housing and you paid $9000, then you are whole.
If you want the $2500 AOC in 2011, then you must spend $4000 on qualified expenses in 2011. A qualified expense could be an expense incurred for 2011 academic periods or a school period that encompasses the first three months of 2012. You can't apply money you spend in 2012 toward a 2011 credit.
You are correct that if distributions from the QTP are not excluded from taxable income, then the AOC may be qualified for if the other requirements are met.
The payment must be made in 2011 to apply to the 2011 AOC. See Publication 970, page 9, 1st full paragraph in the right hand column.
Another thing to consider if financial aid is in the picture: amounts taken from the 529 may affect the aid computation. This is especially the case if the 529 is owned by grandparents (not your situation).
My apologies, but I just want to be crystal clear. The school housing I am paying is NOT afflilated with the University. I'm paying a landlord for an off-campus apartment. The rent alone is greater than on-campus room and board. I interpret from your response that if I draw on the 529 plan for rent only up to the on-campus room and board rate, I am whole (tax-free distribution). If I draw more to cover all the rent, only the excess amount above the on-campus room and board rate is considered a non-qualified distribution. The gain is prorated to the ratio of excess non-qualified portion to the total withdrawal in the tax year for calculation of taxable income, and this goes on my daughter's return if the distributions are made out to her.
Example:
University's advertised on-campus Room and Board for one calendar year $9600
Rent at non University-affiliated off-campus apartment = $10400
a. $9600 is drawn from the 529 in my daughter's name to apply toward rent.
100% tax free.
b. $10400 is drawn in my daughter's name to cover all of the rent. $9600 is qualified, $800 is non-qualified. The gain on the $10400 withdrawal is $2000.
Taxable gain = $2000 x 800/10400 = $154, applied to my daughter's income.
Correct? Or is all of the gain taxable since the apartment is not University-affiliated?
I now have follow-up questions on impact to my and my daughter's Maryland state income, where the 529 plans are Maryland plans and I have been deducting $2500 per account per year from my Maryland income as I have invested $2500 or more in each of these plans every year.
In order to receive the American Opportunity Credit, $4000 of the 529 plan distribution must be considered non-qualified. The taxable portion of the gain resulting from this goes on my daughter's federal return and Maryland return. However, I imagine that Maryland will want an adjustment to add the $4000 original investment back to income since it is now considered non-qualified in order to receive the AOC. If so, on whose return, mine, or my daughter's? I was the one who received the state tax deduction on the original investment, but either the University or she will receive the distributions.
Similar question if I use the 529 to cover all the rent and perhaps food. The taxable portion of gain again will go on my daughter's federal and state returns, but Maryland will want an adjustment to increase income for the original investment that is now taken as a non-qualified distribution. My daughter will receive such distributions in her name. On whose Maryland return would such an adjustment need to be made - mine, or my daughter's?
Correct assuming that the above represents the entirety of higher ed. transactions. E.g., if she spent $800 on books not accounted for by any other tax-free benefit, then no part of the distribution is taxable.
It would be a lot easier to answer your questions below, if you provided a complete example that included the amount distributed from the QTP, any other tax-free amounts (e.g., scholarship), the amount spent on tuition, fees, books, supplies and allowable room and board and whether you plan to take the AOC.
I will tell you that if you read the MD 502 tax form instructions and the referenced document (Administrative Release 32), it would tell you that it is the taxpayer who took the $2500 deduction for contributions to the MD plans that would have to increase income under certain conditions.
As I said in an earlier post, the financial aid office can provide you with the dollar amount they use for off-campus housing in computing financial need. The lesser of that dollar amount or what you student actually spends on off-campus housing is the qualified amount.
IF TOTAL DISTRIBUTIONS ARE LESS THAN TOTAL QUALIFIED EXPENDITURES THEN ALL OF THE INCOME IS EXCLUDIBLE. It makes no difference what you say the money is for. All that is relevant are two numbers: The total distributed and the total qualified expenditures.
Not yet having had any experience in this, and just having seen online the Fall 2011 rates, here is an estimate, all for Fall 2011 semester only. Same University costs apply in Spring 2012.
Tuition and Mandatory Fees: $4328 Advertised On-Campus Room and Board: $4961 Books: $500 (estimate, never having bought before) Supplies: ? What counts? I don't anticipate any class supplies. My daughter already has a laptop. I will buy her a printer for under $100, so any supplies probably can be considered negligible for this example.
My daughter will receive the following scholarships: Tuition and Fees of 50%: $2164 State Scholarship: $450 (applied to any university charges)
Living Expenses Off-campus Rent: $870 per month Apartment Utilities: $50 per month (estimate, not yet having been there, average). This includes internet which may be a qualified expense, but small. Food: $300 per month average
I have the Maryland Prepaid College Trust, which I prepaid at an earlier time guaranteeing covering of tuition and fees. Since my daughter gets a half-tuition scholarship, the trust says I get the balance to apply to other expenses including room and board.
I also have investment in the Maryland College Investment Plan to cover the remaining expenses, enough for on-campus room, board, and other qualified expenses after the scholarships, but not enough today for the off-campus cost in excess of on-campus, unless I continue to contribute to cover these additional expenses.
I also don't know whether my daughter will start living on campus in Spring
2012 or continue to live off campus, TBD. The University told her that for Fall 2011 she could not live on campus, but may be able to live on campus in Spring 2012. After her fall term, she'll have to decide.
So for Fall 2011, I would get $4328 from the prepaid trust QTP in August
2011 to apply to Fall 2011 tuition, fees, room, board, books, supplies. The university's charges would be partially paid by the above scholarships.
At a minimum, I would then draw on the Maryland College Investment Plan to cover the remaining cost of room and board not to exceed the school's advertised $4961 that I would apply toward rent, plus other qualified expenses.
Tuition/Fees: $4328 Scholarship1: -$2164 Scholarship2: -$450 University Room and Board: $4961 Books: $500
Total Net Cost (sum of above): $7175
Amount drawn from Prepaid Trust QTP: $4328 Amount drawn from College Investment Plan QTP: $2847
Total QTP Distribution: $7175
Over those 5 months (August through December), I estimate Rent/Utilities at about $4600, and food at $1500, or $6100, about $1140 more than on campus room and board. So I could opt to draw that much more from the QTPs, a decision to be made.
I would like to take the 2011 AOC.
Excluding Room and Board Costs, the sum of the above Fall 2011 costs including subtracting the scholarships means I've spent $2214. I understand that the first $2000 spent applies toward $2000 AOC, but I have to increase the charges to $4000 to get the AOC up to the maximum $2500. Therefore, I realize that I must draw from the QTP the Spring 2012 tuition/fees (reduced by the scholarships) and also pay the University by December 31, 2011 if I want a maximum AOC. The people at the Maryland Prepaid Trust and at the University Bursar's office I've spoken to act like I'm the first person who has ever asked these questions, and they cannot guarantee when the Spring
2012 bill will be posted (they "think" mid-December) and indicate it "shouldn't take more than 2 weeks" to reimburse me. With the winter holiday season I'm not sure they can pull it off paying me by December 31. I know I won't pay the University until I receive the distribution. So if they take too long and reimburse me in January 2012, then I will pay the University in January 2012, and won't get a full $2500 AOC.
Now for the rest of the Spring Semester. If my daughter stays in the apartment, I have to pay rent through July even though the semester ends in May, so incur much more out of pocket expense if I don't draw from the 529 plan the excess above the University's room and board rate. These charges are paid in 2012 anyway so don't apply to my 2011 plans. However, if she goes on campus, I could conceivably pay room and board charges in December
2011. For now, I'll assume she'll stay in the apartment.
So I must consider whether or not to fund the excess rent above on-campus room and board from the QTP or not. I'm thinking paying the excess out of pocket to avoid the tax hassles, though the taxable gain would go on my daughter's returns and her income will be below the minimum on which to pay tax. The headache would be adding the taxable contribution back to my state income, which is at a marginal 8% rate. Also since I plan to take the AOC, the gain on $4000 of the withdrawal is now taxable.
Then there's the question of whether any taxable gain is subject to an additional 10% federal tax, which I see if it occurs must be paid by my daughter even if the taxable gain results in no tax.
In 2011, I also am now in the married MAGI zone where the AOC is starting to phase out. I may invest in a traditional deductible IRA this year for my wife (who qualifies) to bring our MAGI below the start of the phase out zone.
In the next couple of years after 2011, the value of the AOC will be reduced as my MAGI goes up by $125 per $1000 of additional MAGI. Therefore, I would like to maximize the 2011 AOC.
My example hasn't posted yet since this is a moderated group, but more info is needed.
I estimate current gain on the value of my prepaid trust account as negligible. I estimate the current gain on the value of my Maryland College Investment Plan account as $5700 with a current value of $18300.
I estimate the gain on my prepaid trust account as $4700 with a current value of $35450, and the gain on my College Investment Plan account as $1000 with a current value of $18300.
Add up the QHEE for the AOC that will be paid in 2011 for either the
2011 academic period or the academic period for the first 3 months of
2012. The QHEE includes tuition, required fees and any books, supplies or equipment that is required for a class or for attendance at the school. Subtract from this total any amounts paid for by scholarships. The remainder is the amount eligible for the AOC. If it's at least $4000, you get the maximum credit.
Back to the QTPs:
Add the actual cost of room and board to any excess not used for the AOC above. You can't add an amount that exceeds the higher of what the school would have charged for the fall semester if the beneficiary was in school housing or the amount the school used for financial aid purposes for the Fall period. This is your total expense that will cover any QTP distribution tax-free. If the distribution exceeds this amount, you will have to compute a taxable gain for the beneficiary. In addition, as previously stated, MD Administrative Release 32 states that the taxpayer (you) who took the MD deduction for contributions to the QTP must add back to MD income any excess distribution not spent on QHEE.
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