# Tax question - regarding college students and 529 plans



## EAM (Apr 3, 2010)

If a full-time college student receives money for his qualified educational expenses (room, board, tuition, fees) from a 529 college savings plan of which he is the beneficiary but his parent is the owner, does the 529 plan withdrawal count as the parent providing support or as the student providing his own support?  I would assume the parent since the parent owns the account but I am not sure.

However, if the money for the qualified educational expenses comes from a UTMA account, I would think that this would count as the student providing his own support.  Is that correct?


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## Wonka (Apr 3, 2010)

Great questions. 

 I'm not sure whether the question is being asked from a financial aid standpoint, or tax standpoint.

Here are links to two articles that might help answer your questions:

http://www.extremecollegeplanning.com/

http://www.finaid.org/educators/irsdependent.phtml

Make sure to clink on the link to the support test worksheet in the 2nd article.

Good luck!


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## Mosca (Apr 3, 2010)

Since it was my money, and the student is my dependent, I claimed the education expense (American Opportunity, I think it's called) on my tax return. If that is wrong, I'll find out soon enough.


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## Dave M (Apr 3, 2010)

Oops! If you made a distribution from a 529 plan *and* claimed an American Opportunity credit for some of those same amounts, you did a no-no.

See page 68 ("Coordination With American Opportunity, Hope, and Lifetime Learning Credits") of IRS Publication 970 for how to calculate the taxable portion of the distribution from the 529 plan (also called a "Qualified Tuition Program").


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## EAM (Apr 3, 2010)

Wonka said:


> I'm not sure whether the question is being asked from a financial aid standpoint, or tax standpoint.
> 
> Here are links to two articles that might help answer your questions:
> 
> ...



My question was from a tax standpoint.  The support test worksheet does not refer to 529 plans specifically, but since the parent is the account owner, I would guess that the amounts in the 529 plan would not be included in the student's assets (lines 1 and 4) and that the distributions from the    529 would be included in line 14.  

However, elsewhere http://www.finaid.org/savings/loophole.phtml I can find that distributions from a 529 plan can be considered untaxed income to the student, which would apparently go into line 1. Hence my confusion.


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## EAM (Apr 3, 2010)

I am apparently not the only person who finds the status of 529 distributions in the support test unclear.

http://books.google.com/books?id=4Q...g#v=onepage&q=529 plans support tests&f=false

http://www.taxalmanac.org/index.php/Discussion:529_distribution_in_support_test

H&R Block states that if the student is both owner and beneficiary, then the distribution counts as the student's support.  It does not state what happens when the student is beneficiary but not owner.
http://getitright.hrblock.com/commu...ategoryid=3&category=education#question-96636


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## Wonka (Apr 4, 2010)

EAM said:


> My question was from a tax standpoint.  The support test worksheet does not refer to 529 plans specifically, but since the parent is the account owner, I would guess that the amounts in the 529 plan would not be included in the student's assets (lines 1 and 4) and that the distributions from the    529 would be included in line 14.
> 
> However, elsewhere http://www.finaid.org/savings/loophole.phtml I can find that distributions from a 529 plan can be considered untaxed income to the student, which would apparently go into line 1. Hence my confusion.



OK.  IMHO, a 529 distribution to a beneficiary would be considered "support" for the dependency test for federal income tax purposes.

A cash distribution is not taxable to either the parent or student unless the amount exceeds the amount paid for qualified higher education expenses reduced by expenses for which in-kind benefits (payment vouchers, waivers, etc.).

In-kind distributions if used to pay for qualified higher education expenses are also not taxable.

I hope this helps.


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## Mosca (Apr 4, 2010)

Hmmmm. I put $60000 that I already paid taxes on into a 529.... it sits there and gains a little bit for a while, then loses a bundle right before I have to use it, and it is worth about $43000... and then I can't claim the credit? 

I never used the money as a deduction, I only wanted the interest income on it to be tax free. Since there was a net loss, I think I'm OK on this one.


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## Wonka (Apr 4, 2010)

Mosca said:


> Hmmmm. I put $60000 that I already paid taxes on into a 529.... it sits there and gains a little bit for a while, then loses a bundle right before I have to use it, and it is worth about $43000... and then I can't claim the credit?
> 
> I never used the money as a deduction, I only wanted the interest income on it to be tax free. Since there was a net loss, I think I'm OK on this one.



I'm not sure what you're saying, but Dave M is correct.    If you claimed a credit that you shouldn't have and are audited, the credit will be disallowed (assuming you have a reasonably knowledgeable auditor).

If you want to claim a loss on a 529 plan, it appears you must liquidate the plan.  See the following link:

http://www.associatedcontent.com/article/2540541/you_can_deduct_529_plan_losses.html


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## Mosca (Apr 4, 2010)

I understand. Publication 970 explains that in order to be in conflict, the distribution has to come from the tax-exempt portion of the 529. The entire principal has already had tax paid on it, and I have converted it to cash. I suppose that there is some small amount of interest earned; regardless, I would still well max out the $4000 allowed.


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