529 plan distributions

[cathe]

OK, I need to make sure I am reading this correctly. I am getting 1099-Q's from clients who have had to take money out to live on. I have large gross distributions in box 1. Earnings in box 2 are, so far, negative numbers. Box 3 basis is box 1 and 2 added together as positive numbers.

Since 529 contributions were not tax deductible and there are no positive earnings, these distributions are not taxable, right?

Cathe

[David1980]

Correct. Only the earnings are taxable (if not used for qualified expenses) and you have none.

[Nashville]

Defaults - Related Topic

Not a tax topic, but related to 529s, and definitely something we get exposed to as tax preparers.

States are breaking their promise to people who "prepaid" their college education for their children.

Parents in many states may take out a s.529 plan for their kids, or they may "prepay" by paying TODAYs tuition cost when a child is as young as two years old. At a state school, today's tuition of $5,000 might be $20,000 when diaper boy is ready for college. Theoretically, the state "invests" these funds so that there is $20,000 available for the state to be paid when the student is ready for college.

I don't think this "investing" is anywhere NEAR the truth. I think the states just use the money, and this investing sales pitch is as much a crock as this idea that Social Security "invests" your money for YOU. Now people are wanting their kids to go to college, and states are saying they have to pay today's price. The TV news story didn't go far enough to mention any states that are breaking their promise, but I wonder who they are (if any). Maybe California?

[luke]

be careful

deduction taken on state tax return for those contributions then distributions could be taxable.

[dyne]

I looked up Section 529 distributions in Google and the computations, calculations
and rules are unbelievably complex. Good luck to anyone who attempts to prepare a
return for the student or the student's parents.

[Earl]

529 Plan

1. Determine quallified education expenses: tuition, books, supplies, room and board
2. Reduce this amount by: scholarships, grants, employer provided educational assistance, veterans educational expenses, tuition used for educational credits.
3. Remainder will be qualified educational expenses (AQEE)

4. Taxable earnings
a. Total earnings (1099Q Box 2)
b. AQEE
c/ Total distribution (109Q box 1)
d. Tax Free earnings (4a x (4b divided by 4c)

e. Taxable earnings
a. total earnings minus tax free earnings

[dyne]

What about an adjustment on the STATE tax return? A deduction to a proper Section 529 is
allowed on my STATE tax return so it seems logical that some type of ADDBACK might
be required when a Section 529 plan distribution is made IF the distribution was
NOT used entirely for education expenses. Would a formula like:
QUEE x cost basis divided by total distribution=State ADDBACK be appropriate?
Or perhaps the inverse of this formula?
Instructions for my state are silent regarding this issue.

[Earl]

529

The state of Alabama gives a state tax deduction of $5,000 for state sponsered 529 plan contributions. Distributions are all tax free if used for educational purposes. Possibly your state does the same since they make no mention of being reimbursed when distributions are made.

[Gene V]

Oregon allows $4170 for 529 deduction and if you don't use the money for education, you
add it back to your Oregon tax return.

From Oregon Pub. 17 1/2

Did you withdraw funds from an Oregon 529 College
Savings Network plan for nonqualified purposes? If
so, you will have an “Other addition” on your Oregon
return for the amount you withdrew. Internal Revenue
Code Section 529(e) defines qualified higher education
expenses. For more information about Oregon 529 plans
and examples of qualified withdrawals, see page 61.

[Earl]

529 Example

DISTRIBUTIONS FROM QTP (529 PLANS)



Taxable Portion of Distribution Computation

1. Qualified Education Expenses
a. Tuition $988.00
b. Books $0.00
c. Supplies $0.00
d. Room and Board $0.00
Total $988.00

2. Reduce by:
a. Scholarships $0.00
b. Veterans Educational assistance $0.00
c. Pell grants $0.00
d. Employer provided educational assistance $0.00
e. Any other non-taxble payments received $0.00
f. Tuition used by parents for AOC, Hope or Lifetime Credits $988.00
Total $988.00

3. Adjusted qualified education expenses (1 - 2) $0.00


4. Taxable earnings
a. Total earnings (1099-Q box 2) $528.96
b. AQEE (Line 3) $0.00
c. Total distribution (1099-Q box 1) $988.00

d. Tax free earnings (4a x (4b divided by 4c) $0.00

e. Taxable earnings
a. Total earnings minus tax free earnings $528.96


5. Beneficiary's Standard Deduction $950.00
Beneficiary's Other income $0.00

6. Beneficiary needs to file a return NO