Grandma funded 529 Plan & received the 1099 Q
mmurrell
have the 529 plan send this amount due directly to the college, and
she does not get a 1099 Q for that amount.
However because my daughter lives off campus and buys her books from
a
local bookstore, Grandma withdraws the money for these expenses to
herself, (the only option other than directly to the education
institution),
and gives the money to my daughter as reimbursement. Because
she did this in 2008, she got a 1099 Q, and her CPA put the earnings
amount on the tax return as other income and also showed the 10%
penatly on the earnings. This ended up costing grandma quite a bit
in
state and federal taxes.
How does the 529 plan help pay for books, supplies, and (financial
aid
determined equivelent) room and board when these amounts are NOT due
to the university, and at the same time not show a taxable withdrawl
by grandma?
My daughter is my dependent not grandma's.
It seems to me the 1099 Q and the 1098 T forms are completely
useless. In this case Grandma got the 1099 Q....but there is no
reporting of the SS # associated with the "Qualified Higher Education
Expenses" (the beneficiary). Therefore no tracking! Also the 1099 Q
can report qualified expenses other than just Tuition and Fees, and
will most likely not match the 1098 T. I really don't see any
"control" or usable information either of these forms are providing.
My last 1098 T showed amount of Tuitiona and Fees "billed", not the
amount paid....That information seems useless to me and to the IRS.
What am I not seeing here?
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Phil Marti
> My daughter goes to college and owes Tuition and Fees. Grandma can
> have the 529 plan send this amount due directly to the college, and
> she does not get a 1099 Q for that amount.
>
> However because my daughter lives off campus and buys her books from
> a
> local bookstore, Grandma withdraws the money for these expenses to
> herself, (the only option other than directly to the education
> institution),
> and gives the money to my daughter as reimbursement. Because
> she did this in 2008, she got a 1099 Q, and her CPA put the earnings
> amount on the tax return as other income and also showed the 10%
> penatly on the earnings. This ended up costing grandma quite a bit
> in
> state and federal taxes.
<snip>
> What am I not seeing here?
That Grandma's CPA didn't know what (s)he was doing. (See Chapter 8 of IRS
Publication 970.)
Grandma needs to tell the CPA to bone up on the law and amend the returns.
For free.
Phil Marti
Clarksburg, MD
mmurrell
> "mmurrell" wrote:
Grandma withdraws the money for these expenses to
> > herself, (the only option other than directly to the education
> > institution),
> > and gives the money to my daughter as reimbursement. �
The CPA is still aurguing that he is right. He said he can not find
> any IRS reg or code that would allow Grandma to withdraw the funds and
> then write a check to the beneficiary. In his opinion this would only
> work if Grandma paid for all the QHEE with her own money and then just
> reimbursed herself.
>
> Any guidance?
mmurrell
the law and amend the returns.
> For free.
>
> Phil Marti
> Clarksburg, MD
>
> --
I read chapter 8 in the publication myself and did not see that it
answered the questions at hand. If the owner (grandma) withdraws
funds from the 529 but did not pay for the QHEE herself, but rather
wrote a check to the beneficiary (my daughter) who did pay for the
QHEE have we caused a taxable distribution?
I have read the code section 529 (quoted below), and quite frankley do
not understand what it is talking about when it mentions "In-kind
distributions"
copied from code section 529:
(3) Distributions
(A) In general
Any distribution under a qualified tuition program shall be includible
in the gross income of the distributee in the manner as provided under
section 72 to the extent not excluded from gross income under any
other provision of this chapter.
(B) Distributions for qualified higher education expenses
For purposes of this paragraph�
(i) In-kind distributions No amount shall be includible in gross
income under subparagraph (A) by reason of a distribution which
consists of providing a benefit to the distributee which, if paid for
by the distributee, would constitute payment of a qualified higher
education expense.
(ii) Cash distributions In the case of distributions not described in
clause (i), if�
(I) such distributions do not exceed the qualified higher education
expenses (reduced by expenses described in clause (i)), no amount
shall be includible in gross income, and
(II) in any other case, the amount otherwise includible in gross
income shall be reduced by an amount which bears the same ratio to
such amount as such expenses bear to such distributions.
HLunsford
A 529 plan is established for a beneficiary, in this case the
grandchild. If the funds were distributed directly to the beneficiary
AND used for sanctioned purposes, then there are no tax consequences.
The 1099 form, whatever it's called, shows payee as beneficiary.
However if anyone other than the beneficiary receives the funds and is
the subject of the 1099, then there are tax consequences. Simple. the
CPA is right.
But only the earnings are taxable; not return of principal.
ChEAr$,
Harlan Lunsford, EA n LA
Alan
> On Aug 26, 5:49 am, "Phil Marti" <prm20...@verizon.net> wrote:
>> "mmurrell" wrote:
>
> Grandma withdraws the money for these expenses to
>>> herself, (the only option other than directly to the education
>>> institution),
>>> and gives the money to my daughter as reimbursement.
>
> The CPA is still aurguing that he is right. He said he can not find
>> any IRS reg or code that would allow Grandma to withdraw the funds and
>> then write a check to the beneficiary. In his opinion this would only
>> work if Grandma paid for all the QHEE with her own money and then just
>> reimbursed herself.
>>
>> Any guidance?
>>
>
because it does not exist. The IRS has never updated the Proposed
Regulations (they don't address this issue) and all other
published guidance doesn't address the issue. The IRS has said
that there will be a proposed rule making, but it has not been
published. All that one has to rely on is the wording in Section
529 itself.
The first thing Paragraph C says is that any distribution to the
designated beneficiary or contributor is not taxable unless you
can find an exception in this chapter of the code. So we must
look for the exceptions that would make a distribution taxable.
That occurs in subparagraph 3. It says that in the case of a cash
distribution, no part is taxable as long as the amount is equal
to or less than the qualified expense. Any amount in excess is
taxable using the rules in Section 72.
Therefore, any distribution going to the designated beneficiary
or the contributor that is used for the benefit of a designated
beneficiary that does not exceed the qualified expenses is not
taxable.
I would argue that if the designated beneficiary incurs qualified
higher ed. expense and provides a written request to the
contributor for reimbursement of said expenses and the
contributor withdraws those funds from the qualified plan and
reimburses the specific amount spent by the beneficiary, the
distribution was made for the benefit of the beneficiary and is
not taxable.
mmurrell
> If the funds were distributed directly to the beneficiary
The Oklahoma 529 Plan will NOT distribute directly to the beneficiary.
> AND used for sanctioned purposes, then there are no tax consequences.
In Oklahoma, the 529 plan administrator will only distribute to the
owner or the educational instituion.
> The 1099 form, whatever it's called, shows payee as beneficiary.
The 1099 Q form will go to the beneficiary if the distribution is to
the educational institution. The owner will get the 1099 Q if the
distribution if made to the owner
>
> However if anyone other than the beneficiary receives the funds and is
> the subject of the 1099, then there are tax consequences. �Simple. �the
> CPA is right.
>
> But only the earnings are taxable; not return of principal.
>
> ChEAr$,
> Harlan Lunsford, EA n LA
>
Then the intent of the law could not be followed. In Oklahoma, the
529 plan is set up to only make distributions to the owner or an
educational institution. It will not make distributions to the
beneficiary.
If the beneficiary has legitimate QHEE such as books, supplies, and
the financial aid equivelent of the room and board, but did not owe
these amounts to the education instituion....how could these QHEE be
withdrawn without tax consequences?
I have put a great deal of thought into this and cannot get
comfortable with grandma (the owner) not being able to provide the
beneficary (my daughter) a reimbursement for her QHEE without having
to pay taxes and penalties on the earnings.....Makes no sence.