Hi TT community
With the new tax law in place, I want to use the annual $10,000 withdrawal limit of my daughter's 529 towards her private school this academic year (2018-2019). She is 13 and I have already saved $100,000 in the account. My monthly budget could use the relief the added funds would provide and I am confident she will have enough funds for a 4 year in-state college. Next year she is going to public high school so this is a one time occurrence. I called Maryland 529 and they said it was no problem to take out the funds and use it for a Maryland private school, but they would not provide any tax guidance of course. They stated the check has to come directly to me and I have a choice of it being made out to me as the Account Holder or my daughter as the Beneficiary. Does anyone think that makes a difference? Also, I have chosen to only take $10,000 even though this amount will be spread over the 2018 and 2019 tax year. Is there a benefit or penalty to taking partial this year and the rest in 2019? Any other "gotchas" you think I should be aware of?
Thanks for your help,
I am assuming that Maryland tax law follows federal tax law on this. I only know for a provable fact what federal tax law says concerning 529 funds. (IRS Pub 970 https://www.irs.gov/pub/irs-pdf/p970.pdf). Since the student is a minor you need to have any distributions made payable to you and you must be the one to claim the student as a dependent on your tax return. That student must also qualify as your dependent. Additionally, keep in mind that while schools work in academic years, the IRS does not. So there rules are rather simple really.
- Qualified expenses are claimed/deducted in the tax year they are paid. It does not matter what tax year is paid *for*. So if you take a distribution in 2018 to cover the entire 2018-2019 school year, then you must pay the entire cost for the 2018-2019 school year, and you must pay it *in* 2018. Now lets look at those requirements that allow you to do this tax free on the federal side. (Again, I am assuming MD follows along with federal law on this.)
On page 39 of pub 970 it states that generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses.
Now you need to determine if the school is a qualified school. Still on page 39 of that document it states, for purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school.
Eligible postsecondary school. An eligible postsecondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. The educational institution should be able to tell you if it is an eligible educational institution.
Now to determine what is considered qualified education expenses for 529/Coverdell funds. On page 40 of that document it states Qualified Elementary and Secondary Education Expenses are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses.
The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school.
Tuition and fees.
Books, supplies, and equipment.
Special needs services for a special needs beneficiary.
The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school.
Room and board.
Supplementary items and services (including extended day programs).
The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. (This doesn't include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.)
So to wrap up here, have the distribution check made payable to you, and only withdraw from the 529 in tax year 2018, what you intend to actually pay in 2018.