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Background

The tax law definition for Qualified Higher Education Expenses (QHEE) was amended (signed into law in December of 2019) to include student loan payments (to a maximum of $10,000).

529 withdrawals that are not considered QHEE are subject to income tax on the gains as well as penalties.

This question is about timing of student loan payments as they relate to the associated withdrawal from the 529 account. I see other questions about this tax law change, but none that directly address just this one aspect of timing.

Scenario

During 2019, $5,000 was paid towards existing student loans. No other QHEE's happened during during 2019. No 529 withdrawals were made in 2019 [Clarification: earlier tuition and other QHEE were made in 2017 and earlier, although I don't thing this has any impact on the question].

Question

For the above scenario, can $5,000 be withdrawn (in 2020) from the associated 529 account without interest and penalties? [Clarification: to reimburse myself for the 2019 student loan expense]

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    Please clarify your intent with the $5000 withdrawn in 2020. Also state in what years were educational expenses made. – Morrison Chang Mar 8 at 17:04
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I'll mostly repeat my revised detail from the other answer thread.

The 2019 version of the IRS Publication 970 seems to be fairly clear that you have to take the distribution from a Qualified Tuition Program (e.g. a 529 account) in the same year as the QHEE. I base this on the following three citations from that document, in addition to being unable to find anything in the document indicating that you can smear either QHEEs or QTPs across multiple tax years:

From the publication's Chapter 8 on Qualified Tuition Plans, under the Introduction section:

What is the tax benefit of a QTP?
No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses.

From that same chapter, under Are Distributions Taxable?

Earnings and return of investment. You will receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2019. The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Form 1099-Q should be sent to you by January 31, 2020.

Again from the same chapter, under Figuring the Taxable Portion of a Distribution (adding italics for emphasis):

Taxable Earnings. Use the following steps to figure the taxable part.

  1. Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.
  2. Subtract...

You calculate using the numbers from forms like a 1099-Q or 1099-T, which report numbers from a specific tax year. Given the above wording, I conclude that your QTP distribution must be in the same tax year as a QHEE in order to make the numbers match up as you'd expect.

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