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Question for the Money Doctors

Question submitted on Aug 11, 2012.


I have a client that has paid for their child''s college expenses from 2007-2010, indicated by each of the 1098T. She took the distribution for these past expenses in 2010, which shows up on the 1099-Q 2010. Is she subject to taxes on the earnings? Does the distributions taken from the 529 have to match the year of expenses or can they be applied towards prior years?


529 Plans are an excellent tax-favored way to pay college expenses.

The distribution from the 529 Plan is tax free if it is used to pay for Qualified Higher Education Expenses of the Beneficiary at an Eligible Educational Institution. The Qualified Higher Education Expenses include tuition, certain room & board expenses, fees, books, supplies and equipment required for the enrollment and attendance of the Beneficiary at an Eligible Educational Institution. I assume the child is the beneficiary and her college is an Eligible Educational Institution. (You can check the FAFSA website for a list of schools that quailfy.)

Your client took a distribution in 2010 that covered the expenses for 2007-2010.

If her 2010 distribution exceeds the Qualified Education Expenses, then a portion of the earnings will be subject to income tax and Additional 10% Tax.

Please note the Qualified Education expenses include more than what is reported on Form 1098T. Hopefully your client kept receipts of all the other expenses. If not, take a look at the bank and credit card statements.

However, nowhere can you find an answer to your specific question. The rules do not address the issue of timing of the distribution and the education expenditures. The Proposed Regulations say the money has to be spent within a reasonable time after the distribtuion. The Proposed Regulations also state the beneficiary provide substantiation of payment of qualified higher education expenses within 30 days after making the distribution. These are only Proposed Regulations and have not been enacted yet.

You can get more information from the Disclosure Statement of the 529 provider. It will be a document that will have detailed explanations of the plan and how to compute the taxable portion of a distribution from the 529 plan. You can also look at IRS Publication 970 - Tax Benefits for Education. The 529 information starts on Page 55.

Therefore, it would be a better practice to time the distribution close to the time of the expenditures. There is nothing in the current rules that would prohibit taking a distribution years after the expenditures. However this may change if the Treasury Department finalizes the Regulations and don't know when that will or if it will happen.

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