Grandma funded 529 Plan & received the 1099 Q

That Grandma's CPA didn't know what (s)he was doing. (See Chapter 8 of IRS Publication 970.)

Grandma needs to tell the CPA to bone up on the law and amend the returns. For free.

Phil Marti Clarksburg, MD

Grandma withdraws the money for these expenses to

The CPA is still aurguing that he is right. He said he can not find

On Aug 26, 5:49 am, "Phil Marti" wrote: the law and amend the returns.

I read chapter 8 in the publication myself and did not see that it answered the questions at hand. If the owner (grandma) withdraws funds from the 529 but did not pay for the QHEE herself, but rather wrote a check to the beneficiary (my daughter) who did pay for the QHEE have we caused a taxable distribution?

I have read the code section 529 (quoted below), and quite frankley do not understand what it is talking about when it mentions "In-kind distributions"

copied from code section 529:

(3) Distributions (A) In general Any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter. (B) Distributions for qualified higher education expenses For purposes of this paragraph? (i) In-kind distributions No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. (ii) Cash distributions In the case of distributions not described in clause (i), if? (I) such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i)), no amount shall be includible in gross income, and (II) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions.

A 529 plan is established for a beneficiary, in this case the grandchild. If the funds were distributed directly to the beneficiary AND used for sanctioned purposes, then there are no tax consequences. The 1099 form, whatever it's called, shows payee as beneficiary.

However if anyone other than the beneficiary receives the funds and is the subject of the 1099, then there are tax consequences. Simple. the CPA is right.

But only the earnings are taxable; not return of principal.

ChEAr$, Harlan Lunsford, EA n LA

He can't find any applicable guidance on the specific issue because it does not exist. The IRS has never updated the Proposed Regulations (they don't address this issue) and all other published guidance doesn't address the issue. The IRS has said that there will be a proposed rule making, but it has not been published. All that one has to rely on is the wording in Section

The first thing Paragraph C says is that any distribution to the designated beneficiary or contributor is not taxable unless you can find an exception in this chapter of the code. So we must look for the exceptions that would make a distribution taxable. That occurs in subparagraph 3. It says that in the case of a cash distribution, no part is taxable as long as the amount is equal to or less than the qualified expense. Any amount in excess is taxable using the rules in Section 72.

Therefore, any distribution going to the designated beneficiary or the contributor that is used for the benefit of a designated beneficiary that does not exceed the qualified expenses is not taxable.

I would argue that if the designated beneficiary incurs qualified higher ed. expense and provides a written request to the contributor for reimbursement of said expenses and the contributor withdraws those funds from the qualified plan and reimburses the specific amount spent by the beneficiary, the distribution was made for the benefit of the beneficiary and is not taxable.

The Oklahoma 529 Plan will NOT distribute directly to the beneficiary.

In Oklahoma, the 529 plan administrator will only distribute to the owner or the educational instituion.

The 1099 Q form will go to the beneficiary if the distribution is to the educational institution. The owner will get the 1099 Q if the distribution if made to the owner

Then the intent of the law could not be followed. In Oklahoma, the

If the beneficiary has legitimate QHEE such as books, supplies, and the financial aid equivelent of the room and board, but did not owe these amounts to the education instituion....how could these QHEE be withdrawn without tax consequences?

I have put a great deal of thought into this and cannot get comfortable with grandma (the owner) not being able to provide the beneficary (my daughter) a reimbursement for her QHEE without having to pay taxes and penalties on the earnings.....Makes no sence.