Parents that are planning to send their children to college with the 529 plan funds that they have accumulated over the years, may want to spend extra time understanding the rules for qualified expenses. There are certain college costs that are clearly qualified, while others are somewhat up to interpretation.
What’s a 529 plan?
This tax-free college savings account is sponsored by a particular state or group of states that is used strictly for college expenses. Most states also offer a state tax deduction for contributing to the plan. For instance, a married couple filing jointly with a New York State sponsored plan, could deduct up to $10,000 of their contribution; married filing separate would be up to $5,000 for the year. The funds must be used to pay for college tuition and other eligible expenses or the account holder will face tax penalties.
What are qualified 529 plan expenses?
The obvious ones are tuition and fees, books, supplies, and housing that is required by the eligible university. The not so obvious expenses that may qualify include laptops that are required by the educational institution and off-campus housing expenses that don’t exceed the amount allowed by the university. An argument can also be made for parents to claim dorm room costs such as bedding that the university charges the student. In addition, any university that requires students to obtain their own health insurance, may have a reason to treat the cost as a qualified 529 expense.
Please note that if the parent uses 529 plan funds for anything other than qualified expenses, they are subject to a 10% early withdrawal penalty in addition to any taxes that they may owe for the distribution.
Can I still withdraw from a 529 plan and claim the American Opportunity Credit?
Yes. The American Opportunity Credit or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a 529 plan. The only catch is that the same expenses cannot be used for both tax benefits. For instance, if you’re paying $2,000 in tuition with your 529 plan, you could not claim the American Opportunity Credit for those same expenses.
More tax questions? Browse answers or ask your 529 plan questions online.
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