In these uncertain times there are so many changes and adjustments to financial situations—thus tax impacts. For today, I want to look a bit deeper into refunds received by college students who paid tuition from a 529 savings plan.
If a refund is paid for college tuition the taxpayer has 2 choices:
- Apply the funds to a qualified higher education expense in the same calendar year.
- Make a recontribution to a 529 plan within 60 days of the refund date.
Option 1 can work for refunds received during the spring semester with an upcoming fall semester. If the refund is received near the end of the calendar year you might not have any additional qualified higher educational expenses to be paid in the same calendar year.
If you apply the funds to a qualified higher education expense in the same calendar year be sure to trace the funds and have supporting documentation of the refund and the qualified expenses. If you do not have qualified higher education expenses in the same calendar year the you will be responsible for related penalties and taxes.
Under option 2 the beneficiary of a 529 plan, usually a student, who receives a refund of tuition of other qualified education expense which a 529 distribution was taken can recontribute the refund to a 529 plan within 60 days. Sounds easy right!
The catch is the recontribution must be done within 60 days from the date the refund was issued and should be documented as the taxpayer will not receive a tax form at the end of the year related to the recontribution. Additionally, if you are an Ohio taxpayer with an Ohio College Advantage 529 account there are a few extra steps. The re-deposit must be a check, you must include a signed letter stating the amount is a re-contribution due to a school refund, the account number from which the original 529 withdraw, the initial date of the withdraw, and the date you received the refund from school. Keep a copy of the letter and support for the recontribution with your tax documents and send to your tax preparer with your Form-1099Q.
I enjoy being a tax professional in these uncertain times. It is during these times my curiosity is sparked by a variety of questions. I gain a better understanding, learn something new, and explain the outcomes to the questions posed by my variety of clients – so keep the questions coming.
If you would like to speak to one of our tax specialists for more information, please call: 1 (866) 760-0940 or email me at Brian.Chesnut@brixeyandmeyer.com to setup a time to speak.