Can 529 funds be used for a fully-funded PHD?

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Topic Author
HereToLearn
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Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Mon Feb 17, 2020 11:37 pm

I am getting ahead of myself here as the child needs to complete undergrad and apply for the PHD program, but I anticipate having a modest amount of money unused in his 529 account, and wanted to know if that money can be used to pay for room & board during PHD program? My goal is to spend the balance as I have during undergrad. In other words, not paying taxes on the distributions.

As I understand it, tuition & fees are paid by the university as an untaxed 'scholarship', but the stipend paid for TA work, intended to cover living expenses, is taxed at the federal and state level, but no FICA due. Since the stipend will be taxed as earnings (and as of 2020, eligible as compensation to fund an IRA/Roth), does that mean that 529 funds can be used to pay housing expense?

The student won't be my tax dependent, so will I need to transfer the 529 account to the student's name so that he can use it to pay his own expenses?

DIFAR31
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Re: Can 529 funds be used for a fully-funded PHD?

Post by DIFAR31 » Mon Feb 17, 2020 11:49 pm

HereToLearn wrote:
Mon Feb 17, 2020 11:37 pm
I am getting ahead of myself here as the child needs to complete undergrad and apply for the PHD program, but I anticipate having a modest amount of money unused in his 529 account, and wanted to know if that money can be used to pay for room & board during PHD program? My goal is to spend the balance as I have during undergrad. In other words, not paying taxes on the distributions.

As I understand it, tuition & fees are paid by the university as an untaxed 'scholarship', but the stipend paid for TA work, intended to cover living expenses, is taxed at the federal and state level, but no FICA due. Since the stipend will be taxed as earnings (and as of 2020, eligible as compensation to fund an IRA/Roth), does that mean that 529 funds can be used to pay housing expense?
If the "stipend" is explicitly meant to cover living expenses, there's a good chance that it's a fellowship, which for tax purposes is treated the same as a scholarship or grant. Either way, if it meets or exceeds the program's published cost of attendance for room and board for the student's particular living situation, all of the 529 qualified expenses, other than required books and academic supplies and a computer and associated equipment, will be covered with non-529 money.

The student won't be my tax dependent, so will I need to transfer the 529 account to the student's name so that he can use it to pay his own expenses?
No.

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HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 12:01 am

DIFAR31 wrote:
Mon Feb 17, 2020 11:49 pm
HereToLearn wrote:
Mon Feb 17, 2020 11:37 pm
I am getting ahead of myself here as the child needs to complete undergrad and apply for the PHD program, but I anticipate having a modest amount of money unused in his 529 account, and wanted to know if that money can be used to pay for room & board during PHD program? My goal is to spend the balance as I have during undergrad. In other words, not paying taxes on the distributions.

As I understand it, tuition & fees are paid by the university as an untaxed 'scholarship', but the stipend paid for TA work, intended to cover living expenses, is taxed at the federal and state level, but no FICA due. Since the stipend will be taxed as earnings (and as of 2020, eligible as compensation to fund an IRA/Roth), does that mean that 529 funds can be used to pay housing expense?
If the "stipend" is explicitly meant to cover living expenses, there's a good chance that it's a fellowship, which for tax purposes is treated the same as a scholarship or grant. Either way, if it meets or exceeds the program's published cost of attendance for room and board for the student's particular living situation, all of the 529 qualified expenses, other than required books and academic supplies and a computer and associated equipment, will be covered with non-529 money.

The student won't be my tax dependent, so will I need to transfer the 529 account to the student's name so that he can use it to pay his own expenses?
No.
Thank you. Well, good news on not having to transfer the account to his name, but bad news on the other. I don't know if schools report the stipend as W-2 or 1099, but I do know that the students owe taxes on the stipend portion. I have seen the tuition described as a fellowship but the stipend is simply called a stipend, so who knows what that means!

The stipend may be generous enough to cover more than the university's food & housing allowance, so I am not even sure if textbooks and computers would be eligible. Will have to wait and see where he is admitted, but either way, it doesn't look as though there will be much wiggle room.

Thanks again.

fatFIRE
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Re: Can 529 funds be used for a fully-funded PHD?

Post by fatFIRE » Tue Feb 18, 2020 12:05 am

You should NEVER pay for PhD out of your own pocket. You will get a TA/RA position that is like min-wage and covers tuition.

PhD has a high opportunity cost, and I won't say I regret doing a PhD, but given my circumstances it was the right move at that time. I will not recommend doing a PhD for the average person.

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 12:09 am

fatFIRE wrote:
Tue Feb 18, 2020 12:05 am
You should NEVER pay for PhD out of your own pocket. You will get a TA/RA position that is like min-wage and covers tuition.

PhD has a high opportunity cost, and I won't say I regret doing a PhD, but given my circumstances it was the right move at that time. I will not recommend doing a PhD for the average person.
No one will be paying for the PHD. Fully-funded STEM program. Personally, I cannot contemplate five more years of study, but fortunately I am not the one doing it!

I want to know if I can use remaining 529 funds for any random expenses. The stipends seem to range from low $20's to mid $30s, and depending on location, a supplement could help, if it were allowed.

ivk5
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Re: Can 529 funds be used for a fully-funded PHD?

Post by ivk5 » Tue Feb 18, 2020 7:20 am

I don’t have anything to add to the 529 question, but as for W2 vs 1099 etc:

My wife did a funded PhD program (not a STEM field). At the time her program made at least a year of the funding package dependent on teaching. For those periods she received a W2. For other periods, her stipend was not reported on any form, and she had to self-report as other income on her return; pre-doctoral fellowships, grants, stipends, etc are not reported on a 1099. (Post-doctoral funding, in contrast, is reported.)

In both cases this excludes the amounts applied to tuition and most fees, which were never paid to her (treated more as a waiver). Those latter amounts are not treated as income to the student.

kayakprof
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Re: Can 529 funds be used for a fully-funded PHD?

Post by kayakprof » Tue Feb 18, 2020 7:46 am

By no means am I an expert on 529 regulations, but on the surface this sounds pretty simple. You can use a 529 to cover the cost of room and board up to the amount listed as official cost of attendance by the college. If the stipend is pay for working as a TA or RA or in some other capacity, then the student should be able to use the stipend however they please, and you should be able to use the 529 for room/board. If the stipend is explicitly designed to cover room and board (i.e. one cannot use it in any other way), that would muddy the waters, but that seems unlikely.

I really like the idea of the 529 covering tuition and board and the stipend being used to fund a Roth IRA. One of the big downsides to enrolling in a PhD program is the time lost contributing to retirement funds while one stays in school for many extra years. Many of my peers didn't contribute anything until they were in their late 20's or early 30's. That is a lot of lost compounding.

Spirit Rider
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Re: Can 529 funds be used for a fully-funded PHD?

Post by Spirit Rider » Tue Feb 18, 2020 8:20 am

One of the positive additions in the SECURE Act starting in 2020. Taxable fellowship and stipend payments not reported on a W-2 are now considered IRA compensation. This allows students with only such payments to make IRA contributions.

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HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 10:53 am

ivk5 wrote:
Tue Feb 18, 2020 7:20 am
I don’t have anything to add to the 529 question, but as for W2 vs 1099 etc:

My wife did a funded PhD program (not a STEM field). At the time her program made at least a year of the funding package dependent on teaching. For those periods she received a W2. For other periods, her stipend was not reported on any form, and she had to self-report as other income on her return; pre-doctoral fellowships, grants, stipends, etc are not reported on a 1099. (Post-doctoral funding, in contrast, is reported.)

In both cases this excludes the amounts applied to tuition and most fees, which were never paid to her (treated more as a waiver). Those latter amounts are not treated as income to the student.
Thanks for the detailed explanation. Perhaps if his program requires teaching, which many do seem to require during the first two MS years, then he will receive a W-2, allowing me to use 529 funds.

I have the feeling that stipend reporting varies across schools. He received a stipend for last summer's research. The pay stub said fellowship, and the 1099-MISC reported the stipend in Box 3 as Other Income. This is currently causing me to go around in circles with TurboTax. The payroll dept of the university knew nothing about the stipend earnings, as they only knew of his hourly W-2 earnings for TA work. (I had him contact payroll late last year, attempting to understand how the stipend earnings would be reported. Needless to say, I have concluded that university reporting is decentralized and inconsistent across schools.)

Thanks again!

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 10:58 am

kayakprof wrote:
Tue Feb 18, 2020 7:46 am
By no means am I an expert on 529 regulations, but on the surface this sounds pretty simple. You can use a 529 to cover the cost of room and board up to the amount listed as official cost of attendance by the college. If the stipend is pay for working as a TA or RA or in some other capacity, then the student should be able to use the stipend however they please, and you should be able to use the 529 for room/board. If the stipend is explicitly designed to cover room and board (i.e. one cannot use it in any other way), that would muddy the waters, but that seems unlikely.

I really like the idea of the 529 covering tuition and board and the stipend being used to fund a Roth IRA. One of the big downsides to enrolling in a PhD program is the time lost contributing to retirement funds while one stays in school for many extra years. Many of my peers didn't contribute anything until they were in their late 20's or early 30's. That is a lot of lost compounding.
Thanks. Yes, one of my concerns of pursuing a PHD is the many years of lost income, and lost savings during that same time period. The fact that he is spending his summers conducting funded research is not helping any!

The fact that university W-2 earnings are free of FICA does not bother me as much, as I cannot imagine SS being around in 50 years.

Spirit Rider
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Re: Can 529 funds be used for a fully-funded PHD?

Post by Spirit Rider » Tue Feb 18, 2020 11:43 am

HereToLearn wrote:
Tue Feb 18, 2020 10:53 am
I have the feeling that stipend reporting varies across schools. He received a stipend for last summer's research. The pay stub said fellowship, and the 1099-MISC reported the stipend in Box 3 as Other Income. This is currently causing me to go around in circles with TurboTax. The payroll dept of the university knew nothing about the stipend earnings, as they only knew of his hourly W-2 earnings for TA work. (I had him contact payroll late last year, attempting to understand how the stipend earnings would be reported. Needless to say, I have concluded that university reporting is decentralized and inconsistent across schools.)
Colleges and Universities are notorious for being non-compliant with reporting taxable fellowships, scholarships and stipends. IRS guidance is very clear that these should be reported as W-2 wages. Yet many colleges and universities routinely disregard this guidance and report them on 1099-MISC Box 3, even worse on 1099-MISC Box 7 or some don't report them at all.

There is so much non-compliance, the IRS even includes in Form 1040 instructions, Line 1 how to report the payments as wages. My belief is that colleges and universities are just too lazy to determine which payments are taxable and what W-2 wages would be subject to FICA. Instead they push the responsibility down to the student. The IRS is complicit, because they do not enforce their guidance. Probably because colleges and universities have powerful politicians, alumni and advocates.

ivk5
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Re: Can 529 funds be used for a fully-funded PHD?

Post by ivk5 » Tue Feb 18, 2020 12:08 pm

Spirit Rider wrote:
Tue Feb 18, 2020 11:43 am
Colleges and Universities are notorious for being non-compliant with reporting taxable fellowships, scholarships and stipends. IRS guidance is very clear that these should be reported as W-2 wages.
I am not sure that's right. From the 1099-MISC instructions:
Scholarships. Do not use Form 1099-MISC to report
scholarship or fellowship grants. Scholarship or fellowship
grants that are taxable to the recipient because they are paid
for teaching, research, or other services as a condition for
receiving the grant are considered wages and must be
reported on Form W-2. Other taxable scholarship or
fellowship payments (to a degree or nondegree candidate)
do not have to be reported to the IRS on any form
, unless
section 6050S requires reporting of such amounts by an
educational institution on Form 1098-T, Tuition Statement.
See section 117(b)–(d) and Regulations section 1.6041-3(n)
for more information.
This is consistent with, e.g., https://www.hks.harvard.edu/sites/defau ... Grants.pdf:
Will I receive a tax reporting form from the University showing fellowship
amounts?

The answer depends on your tax classification in the U. S. The University is not
required to report fellowship amounts for U. S. citizens or individuals, who are
resident aliens for tax purposes, on a Form 1099 or other formal tax document.
Therefore, it is important to keep your own records or to seek a summary from
your department in order to have the information necessary to prepare your
personal tax return.
Spirit Rider wrote:
Tue Feb 18, 2020 11:43 am
Yet many colleges and universities routinely disregard this guidance and report them on 1099-MISC Box 3, even worse on 1099-MISC Box 7 or some don't report them at all.
Yes. My wife got a 1099-MISC Box 7 from one institution for a small grant from an incompetent institution (actually the US "Friends of" arm of a UK museum). She challenged it, and they stood their ground (our accountant says you performed a service for us since you produced a report summarizing the research you performed with the grant money). Arg. We could have disputed it with the IRS, I suppose, but we decided it was not worth the fuss and grudgingly reported it as SE income.

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 12:32 pm

Spirit Rider wrote:
Tue Feb 18, 2020 11:43 am
HereToLearn wrote:
Tue Feb 18, 2020 10:53 am
I have the feeling that stipend reporting varies across schools. He received a stipend for last summer's research. The pay stub said fellowship, and the 1099-MISC reported the stipend in Box 3 as Other Income. This is currently causing me to go around in circles with TurboTax. The payroll dept of the university knew nothing about the stipend earnings, as they only knew of his hourly W-2 earnings for TA work. (I had him contact payroll late last year, attempting to understand how the stipend earnings would be reported. Needless to say, I have concluded that university reporting is decentralized and inconsistent across schools.)
Colleges and Universities are notorious for being non-compliant with reporting taxable fellowships, scholarships and stipends. IRS guidance is very clear that these should be reported as W-2 wages. Yet many colleges and universities routinely disregard this guidance and report them on 1099-MISC Box 3, even worse on 1099-MISC Box 7 or some don't report them at all.

There is so much non-compliance, the IRS even includes in Form 1040 instructions, Line 1 how to report the payments as wages. My belief is that colleges and universities are just too lazy to determine which payments are taxable and what W-2 wages would be subject to FICA. Instead they push the responsibility down to the student. The IRS is complicit, because they do not enforce their guidance. Probably because colleges and universities have powerful politicians, alumni and advocates.
I truly do not know what to think but have been going around on this for weeks now! Here is what I have learned, but please correct me if any of my statements are incorrect. This is my first run through with this, but I will be dealing with the same this time next year also.

Since the students are not enrolled in class during the summer, they would owe FICA on the summer stipend if it were reported as W-2 income. If the stipend were reported in box 7 of 1099-MISC, then it would be subject to SE/FICA of 15.3%. So perhaps reporting it in box 3 results in the lowest tax liability, and the university thinks they are helping? However, entering the 1099-MISC box 3 figure in TurboTax produces an interview with different results based on how the interview questions are answered: SE income or kiddie tax. Neither is a desired outcome.

If I follow the advice you pointed me to, I assume that the earnings would all fall below the $12,200 standard deduction, and no federal tax would be due.

Form 1040 instructions, Line 1 how to report the payments as wages.

"Scholarship and fellowship grants not reported on Form W-2. Also, enter “SCH” and the amount on the dotted line next to line 1. However, if you were a degree candidate, include on line 1 on- ly the amounts you used for expenses other than tuition and course-related ex- penses. For example, amounts used for room, board, and travel must be reported on line 1."

I haven't attempted this yet, and I guess I will have to delete the 1099-MISC info as otherwise Turbo Tax will continue to attempt to tax the earnings. His total earnings are far below the $12,200 standard exemption, so I am tempted to not file taxes at all. However, I am worried that the existence of the 1099-MISC will result in an inquiry.

Very messy, and there must be thousands of college students trapped in the same situation every year.

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 12:54 pm

ivk5 wrote:
Tue Feb 18, 2020 12:08 pm
Spirit Rider wrote:
Tue Feb 18, 2020 11:43 am
Colleges and Universities are notorious for being non-compliant with reporting taxable fellowships, scholarships and stipends. IRS guidance is very clear that these should be reported as W-2 wages.
I am not sure that's right. From the 1099-MISC instructions:
Scholarships. Do not use Form 1099-MISC to report
scholarship or fellowship grants. Scholarship or fellowship
grants that are taxable to the recipient because they are paid
for teaching, research, or other services as a condition for
receiving the grant are considered wages and must be
reported on Form W-2. Other taxable scholarship or
fellowship payments (to a degree or nondegree candidate)
do not have to be reported to the IRS on any form
, unless
section 6050S requires reporting of such amounts by an
educational institution on Form 1098-T, Tuition Statement.
See section 117(b)–(d) and Regulations section 1.6041-3(n)
for more information.
This is consistent with, e.g., https://www.hks.harvard.edu/sites/defau ... Grants.pdf:
Will I receive a tax reporting form from the University showing fellowship
amounts?

The answer depends on your tax classification in the U. S. The University is not
required to report fellowship amounts for U. S. citizens or individuals, who are
resident aliens for tax purposes, on a Form 1099 or other formal tax document.
Therefore, it is important to keep your own records or to seek a summary from
your department in order to have the information necessary to prepare your
personal tax return.
Spirit Rider wrote:
Tue Feb 18, 2020 11:43 am
Yet many colleges and universities routinely disregard this guidance and report them on 1099-MISC Box 3, even worse on 1099-MISC Box 7 or some don't report them at all.
Yes. My wife got a 1099-MISC Box 7 from one institution for a small grant from an incompetent institution (actually the US "Friends of" arm of a UK museum). She challenged it, and they stood their ground (our accountant says you performed a service for us since you produced a report summarizing the research you performed with the grant money). Arg. We could have disputed it with the IRS, I suppose, but we decided it was not worth the fuss and grudgingly reported it as SE income.
Oh....this has just made everything even more confusing, but I know that you are only trying to help, and I sincerely appreciate the help as I know so little on this topic.

Quoting from your post above (and I still cannot figure out how to quote):

"Scholarship or fellowship
grants that are taxable to the recipient because they are paid
for teaching, research, or other services as a condition for
receiving the grant are considered wages and must be
reported on Form W-2. Other taxable scholarship or
fellowship payments (to a degree or nondegree candidate)
do not have to be reported to the IRS on any form."

He is an undergrad who was paid a stipend for summer research. The payment was identified as fellowship on the pay stub. Summer research is not a graduation requirement, but the program is only open to students from his university.

This statement seems to contradict the prior statement:

"The answer depends on your tax classification in the U. S. The University is not
required to report fellowship amounts for U. S. citizens or individuals, who are
resident aliens for tax purposes, on a Form 1099 or other formal tax document.
Therefore, it is important to keep your own records or to seek a summary from
your department in order to have the information necessary to prepare your
personal tax return."

While it would be ideal if he didn't have to pay taxes, I am more concerned with doing the right thing.

And then you get into the whole question of whether or not a return is actually required and if this 'income' is earned or unearned.

https://www.irs.gov/publications/p929#e ... nk10001487

DIFAR31
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Re: Can 529 funds be used for a fully-funded PHD?

Post by DIFAR31 » Tue Feb 18, 2020 1:13 pm

HereToLearn wrote:
Tue Feb 18, 2020 12:54 pm
And then you get into the whole question of whether or not a return is actually required and if this 'income' is earned or unearned.

https://www.irs.gov/publications/p929#e ... nk10001487
As I think you are aware, whether the payment is considered earned or unearned income depends on which part of the revenue code you are looking at.

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 1:26 pm

DIFAR31 wrote:
Tue Feb 18, 2020 1:13 pm
HereToLearn wrote:
Tue Feb 18, 2020 12:54 pm
And then you get into the whole question of whether or not a return is actually required and if this 'income' is earned or unearned.

https://www.irs.gov/publications/p929#e ... nk10001487
As I think you are aware, whether the payment is considered earned or unearned income depends on which part of the revenue code you are looking at.
No, I am not aware. I truly know very little about any of this. And cannot figure out what the right thing to do is here.

DIFAR31
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Re: Can 529 funds be used for a fully-funded PHD?

Post by DIFAR31 » Tue Feb 18, 2020 1:34 pm

HereToLearn wrote:
Tue Feb 18, 2020 1:26 pm
No, I am not aware. I truly know very little about any of this. And cannot figure out what the right thing to do is here.
For the purpose of determining the standard deduction for a tax dependent, a taxable scholarship or fellowship grant is considered to be earned income (this is a good thing as it potentially results in a higher standard deduction). For the purpose of determining income subject to the kiddie tax, taxable scholarships and fellowship grants not reported on a W-2 are considered to be unearned income (there is no upside to this designation).

Spirit Rider
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Re: Can 529 funds be used for a fully-funded PHD?

Post by Spirit Rider » Tue Feb 18, 2020 1:42 pm

There are workarounds available on the TurboTax website somewhere. I do not have the exact descriptions in front of me. It goes something like this.

The TurboTax workarounds satisfy the IRS 1099-MISC matching algorithms and avoid Kiddie taxes or SE taxes.:
  • In both cases report the amount on Form 1040, Line 1 as wages with a description "SCH"
    • Box 3: Normal entry causing reporting as other income on Form 1040, Schedule 1, Line 8 and add equal negative additional other income with a description indicating reported on Form 1040, Line 1 as wages. Result $0 other income. No unearned income amount, no Kiddie tax treatment.
    • Box 7: Normal entry causing generation of Schedule C with reporting as Part 1 Income, Line 1 Gross receipts or sales. Report equal amount in Part II Expenses, Line 27a Other expenses (from line 48), Part V Other expenses with a description indicating reported on Form 1040, Line as wages with total in Line 48. Result $0 business profit and $0 SE taxes.

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 2:54 pm

DIFAR31 wrote:
Tue Feb 18, 2020 1:34 pm
HereToLearn wrote:
Tue Feb 18, 2020 1:26 pm
No, I am not aware. I truly know very little about any of this. And cannot figure out what the right thing to do is here.
For the purpose of determining the standard deduction for a tax dependent, a taxable scholarship or fellowship grant is considered to be earned income (this is a good thing as it potentially results in a higher standard deduction). For the purpose of determining income subject to the kiddie tax, taxable scholarships and fellowship grants not reported on a W-2 are considered to be unearned income (there is no upside to this designation).
How can this be??? I am not questioning your explanation, but questioning why this would be the case? What was the tax code setting out to 'catch' by considering fellowship earnings as being subject to kiddie tax?

Am I supposed to file his taxes two ways? Or do we get to choose the one we like better?

If I understand what you wrote above, he would not owe taxes under the first scenario but would under the second.

Agh!

Topic Author
HereToLearn
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Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 2:56 pm

Spirit Rider wrote:
Tue Feb 18, 2020 1:42 pm
There are workarounds available on the TurboTax website somewhere. I do not have the exact descriptions in front of me. It goes something like this.

The TurboTax workarounds satisfy the IRS 1099-MISC matching algorithms and avoid Kiddie taxes or SE taxes.:
  • In both cases report the amount on Form 1040, Line 1 as wages with a description "SCH"
    • Box 3: Normal entry causing reporting as other income on Form 1040, Schedule 1, Line 8 and add equal negative additional other income with a description indicating reported on Form 1040, Line 1 as wages. Result $0 other income. No unearned income amount, no Kiddie tax treatment.
    • Box 7: Normal entry causing generation of Schedule C with reporting as Part 1 Income, Line 1 Gross receipts or sales. Report equal amount in Part II Expenses, Line 27a Other expenses (from line 48), Part V Other expenses with a description indicating reported on Form 1040, Line as wages with total in Line 48. Result $0 business profit and $0 SE taxes.
Thanks. I can try that, but I am still uncertain if that is 'allowed'. He didn't have any Schedule C expenses, so that would be a fabrication.

His taxes should be so simple that I could file them with pen and paper, but then that wouldn't capture the 1099?

I know I keep repeating myself, but what a mess.

DIFAR31
Posts: 414
Joined: Mon Jan 01, 2018 5:51 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by DIFAR31 » Tue Feb 18, 2020 4:17 pm

HereToLearn wrote:
Tue Feb 18, 2020 2:54 pm
DIFAR31 wrote:
Tue Feb 18, 2020 1:34 pm
HereToLearn wrote:
Tue Feb 18, 2020 1:26 pm
No, I am not aware. I truly know very little about any of this. And cannot figure out what the right thing to do is here.
For the purpose of determining the standard deduction for a tax dependent, a taxable scholarship or fellowship grant is considered to be earned income (this is a good thing as it potentially results in a higher standard deduction). For the purpose of determining income subject to the kiddie tax, taxable scholarships and fellowship grants not reported on a W-2 are considered to be unearned income (there is no upside to this designation).
How can this be??? I am not questioning your explanation, but questioning why this would be the case? What was the tax code setting out to 'catch' by considering fellowship earnings as being subject to kiddie tax?
Your questions should be directed at someone who actually had a hand in crafting these policies.

Am I supposed to file his taxes two ways? Or do we get to choose the one we like better?
No, you can't choose. There's a method to the madness.

If I understand what you wrote above, he would not owe taxes under the first scenario but would under the second.
No. If the taxpayer isn't required to file a tax return, the kiddie tax does not come into play at all. If your child's only taxable income is $10,000 in taxable scholarships and $2,000 in W-2 wage income, that entire amount would be covered by his standard deduction and he would not be required to file a return. If he had the $10,000 in taxable scholarships plus $6,000 in W-2 wage income, he would be required to file a return that includes form 8615 for the kiddie tax. The kiddie tax only comes into play in there is unearned income (for the kiddie tax this includes taxable scholarships) in a scenario where a return is required to be filed.

Topic Author
HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 4:30 pm

DIFAR31 wrote:
Tue Feb 18, 2020 4:17 pm
HereToLearn wrote:
Tue Feb 18, 2020 2:54 pm
DIFAR31 wrote:
Tue Feb 18, 2020 1:34 pm
HereToLearn wrote:
Tue Feb 18, 2020 1:26 pm
No, I am not aware. I truly know very little about any of this. And cannot figure out what the right thing to do is here.
For the purpose of determining the standard deduction for a tax dependent, a taxable scholarship or fellowship grant is considered to be earned income (this is a good thing as it potentially results in a higher standard deduction). For the purpose of determining income subject to the kiddie tax, taxable scholarships and fellowship grants not reported on a W-2 are considered to be unearned income (there is no upside to this designation).
How can this be??? I am not questioning your explanation, but questioning why this would be the case? What was the tax code setting out to 'catch' by considering fellowship earnings as being subject to kiddie tax?
Your questions should be directed at someone who actually had a hand in crafting these policies.

Am I supposed to file his taxes two ways? Or do we get to choose the one we like better?
No, you can't choose. There's a method to the madness.

If I understand what you wrote above, he would not owe taxes under the first scenario but would under the second.
No. If the taxpayer isn't required to file a tax return, the kiddie tax does not come into play at all. If your child's only taxable income is $10,000 in taxable scholarships and $2,000 in W-2 wage income, that entire amount would be covered by his standard deduction and he would not be required to file a return. If he had the $10,000 in taxable scholarships plus $6,000 in W-2 wage income, he would be required to file a return that includes form 8615 for the kiddie tax. The kiddie tax only comes into play in there is unearned income (for the kiddie tax this includes taxable scholarships) in a scenario where a return is required to be filed.
OK, I was laughing while reading your first two responses. A bit like Alice in Wonderland!

Sigh. Yes, only earnings for the year were W-2 TA hourly pay, and summer research stipend reported on 1099-MISC box 3. Totals were less than half of the figures you quoted for both. (No interest, no dividends, no financial aid. Nothing. Just a 529 plan paid directly to the university to attend school.)

Will not filing a return be a problem since his university issued a 1099-MISC for the summer stipend? Will the IRS be looking for a return? He was planning to fund his Roth up to the amount of his modest W-2 earnings. (Not trying to complicate the picture here...)

THANK YOU!

Spirit Rider
Posts: 13195
Joined: Fri Mar 02, 2007 2:39 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by Spirit Rider » Tue Feb 18, 2020 4:39 pm

HereToLearn wrote:
Tue Feb 18, 2020 2:56 pm
Thanks. I can try that, but I am still uncertain if that is 'allowed'. He didn't have any Schedule C expenses, so that would be a fabrication.

His taxes should be so simple that I could file them with pen and paper, but then that wouldn't capture the 1099?

I know I keep repeating myself, but what a mess.
It is 100% allowed. It is not a fabrication. You are not claiming an expense you don't have.

You are simply using Schedule C (box 7) or other income (box 3) to reconcile the respective Form 1099-MISC to properly report the income as Form 1040, Line 1 wages as directed by the IRS.

If you don't do this and just report the income on Form 1040, Line 1 wages. The IRS Form 1099-MISC matching algorithm will detect you didn't report the income. This could likely result in a CP2000 notice.

DIFAR31
Posts: 414
Joined: Mon Jan 01, 2018 5:51 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by DIFAR31 » Tue Feb 18, 2020 4:41 pm

HereToLearn wrote:
Tue Feb 18, 2020 4:30 pm
Will not filing a return be a problem since his university issued a 1099-MISC for the summer stipend? Will the IRS be looking for a return? He was planning to fund his Roth up to the amount of his modest W-2 earnings. (Not trying to complicate the picture here...)

THANK YOU!
If he's not required to file because his earnings do not exceed his standard deduction, there are only two reasons that I can think of to file:

1) He wants a refund of federal tax withheld.

2) The 1099-MISC amount for whatever reason is considered self-employment income that isn't exempt from FICA. In that case he would need to file to pay the self-employment tax.

If #2 doesn't apply and he doesn't file, and the IRS is looking for a return and gets suspicious, just make sure he can document everything to back up the decision not to file a return.

Topic Author
HereToLearn
Posts: 670
Joined: Sat Mar 17, 2018 5:53 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 4:48 pm

Spirit Rider wrote:
Tue Feb 18, 2020 4:39 pm
HereToLearn wrote:
Tue Feb 18, 2020 2:56 pm
Thanks. I can try that, but I am still uncertain if that is 'allowed'. He didn't have any Schedule C expenses, so that would be a fabrication.

His taxes should be so simple that I could file them with pen and paper, but then that wouldn't capture the 1099?

I know I keep repeating myself, but what a mess.
It is 100% allowed. It is not a fabrication. You are not claiming an expense you don't have.

You are simply using Schedule C (box 7) or other income (box 3) to reconcile the respective Form 1099-MISC to properly report the income as Form 1040, Line 1 wages as directed by the IRS.

If you don't do this and just report the income on Form 1040, Line 1 wages. The IRS Form 1099-MISC matching algorithm will detect you didn't report the income. This could likely result in a CP2000 notice.
OK...Thank you!

Topic Author
HereToLearn
Posts: 670
Joined: Sat Mar 17, 2018 5:53 pm

Re: Can 529 funds be used for a fully-funded PHD?

Post by HereToLearn » Tue Feb 18, 2020 4:51 pm

DIFAR31 wrote:
Tue Feb 18, 2020 4:41 pm
HereToLearn wrote:
Tue Feb 18, 2020 4:30 pm
Will not filing a return be a problem since his university issued a 1099-MISC for the summer stipend? Will the IRS be looking for a return? He was planning to fund his Roth up to the amount of his modest W-2 earnings. (Not trying to complicate the picture here...)

THANK YOU!
If he's not required to file because his earnings do not exceed his standard deduction, there are only two reasons that I can think of to file:

1) He wants a refund of federal tax withheld.

2) The 1099-MISC amount for whatever reason is considered self-employment income that isn't exempt from FICA. In that case he would need to file to pay the self-employment tax.

If #2 doesn't apply and he doesn't file, and the IRS is looking for a return and gets suspicious, just make sure he can document everything to back up the decision not to file a return.
The SE income not exempt from FICA is the one thing still nagging at my mind. The only saving grace is that the stipend was reported in box 3 instead of box 7. I will keep all of these thread discussions somewhere to remind myself of what my thinking was in case the IRS ever comes knocking. (Kidding...)

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