529 Questions. Double tax breaks?
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529 Questions. Double tax breaks?
Two questions about 529 accounts, illustrated with hypothetical scenarios...
- Say I have a 529 account in my name. However, my grandparents have graciously offered to pay for my tuition bill as it can be done tax free if paid directly (no gift tax). Let's say tuition was 50K and qualified expenses (room board etc) were 20K. Would I be able to withdraw 20K or 70K tax free (assume all in same year)?
- Are there any rules with what you can do with your money after you withdraw before you pay? Say I withdraw in January and no payment is due until August. Could I invest that money in the mean time or does it have to sit in a saving account. I assume that as long as I eventually pay my qualified exoenses by whatever means that it would be fine but a bit unclear.
Thank you all, I love this forum.
- Say I have a 529 account in my name. However, my grandparents have graciously offered to pay for my tuition bill as it can be done tax free if paid directly (no gift tax). Let's say tuition was 50K and qualified expenses (room board etc) were 20K. Would I be able to withdraw 20K or 70K tax free (assume all in same year)?
- Are there any rules with what you can do with your money after you withdraw before you pay? Say I withdraw in January and no payment is due until August. Could I invest that money in the mean time or does it have to sit in a saving account. I assume that as long as I eventually pay my qualified exoenses by whatever means that it would be fine but a bit unclear.
Thank you all, I love this forum.
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Re: 529 Questions. Double tax breaks?
Your plan is sound.
Qualified Education Expenses are not reduced by gifts. You would be allowed to withdraw tax free, all qualified (tuition, fees, text books, room and board, computer equipment, etc...) expenses from a 529 plan. You need to have proof of the expenses and payments to make qualified withdrawals.
Actual payments or the money for them can be gifts, direct or indirect. Only direct payments for tuition receive an exclusion for gift tax reporting in addition to the $14K annual exclusion. Your grandparents would only be subject to gift taxes/estate taxes only when the total of reported gifts and their estate exceed the unified lifetime exclusion.
You generally would want make 529 withdrawals later in the year to allow any earnings to be tax free. Just be sure that expense payments and 529 withdrawals occur in the same year. Other than that there is no restrictions once the withdrawals are made.
Qualified Education Expenses are not reduced by gifts. You would be allowed to withdraw tax free, all qualified (tuition, fees, text books, room and board, computer equipment, etc...) expenses from a 529 plan. You need to have proof of the expenses and payments to make qualified withdrawals.
Actual payments or the money for them can be gifts, direct or indirect. Only direct payments for tuition receive an exclusion for gift tax reporting in addition to the $14K annual exclusion. Your grandparents would only be subject to gift taxes/estate taxes only when the total of reported gifts and their estate exceed the unified lifetime exclusion.
You generally would want make 529 withdrawals later in the year to allow any earnings to be tax free. Just be sure that expense payments and 529 withdrawals occur in the same year. Other than that there is no restrictions once the withdrawals are made.
Re: 529 Questions. Double tax breaks?
Where is the double tax break? I'm not seeing it.
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Re: 529 Questions. Double tax breaks?
No gift tax paid by grandparents.Nate79 wrote:Where is the double tax break? I'm not seeing it.
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Re: 529 Questions. Double tax breaks?
This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
Re: 529 Questions. Double tax breaks?
If a grandparent provides any type of financial support to the student, that support is reportable on the following year’s FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free).Oompadeedoo wrote:This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.
Re: 529 Questions. Double tax breaks?
don't know where you are located -
but here in Illinois - the BrightStart 529 gives a IL 1040 tax break for contributions to their 529 plan.
but here in Illinois - the BrightStart 529 gives a IL 1040 tax break for contributions to their 529 plan.
Last edited by ps56k on Wed May 24, 2017 5:59 pm, edited 1 time in total.
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Re: 529 Questions. Double tax breaks?
Starting with the 2017/2018 school year, FAFSA uses the prior-prior tax year. So grandparents or other third parties can fund after 1/1 of the last 2 1/2 years.4strings wrote:If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.
Re: 529 Questions. Double tax breaks?
Why take it out of a 529 where the earnings are tax-free and move it to a taxable account? Are withdrawals aligned to tax years or academic calendar or both?Oompadeedoo wrote:- Are there any rules with what you can do with your money after you withdraw before you pay? Say I withdraw in January and no payment is due until August. Could I invest that money in the mean time or does it have to sit in a saving account. I assume that as long as I eventually pay my qualified exoenses by whatever means that it would be fine but a bit unclear.
If the parents own the 529 with child as beneficiary, and the grandparents pay the tuition directly, who gets the funds from the 529, the parent or the child?Oompadeedoo wrote:This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
If the grandparents (high tax bracket) had highly appreciated stock instead of just cash, and gift tax isn't expected to be an issue, would UTMA be a better option?
Trying to separate the 2 tax issues, tax-free benefit of a 529 account vs gift tax/inheritance.