How to Make Sure That Your 529 Distribution is Tax Free

A 529 plan is a qualified tuition program operated by a state or education institution that allows you to save for your child or other beneficiary’s future college education expenses. The main tax benefit is that the investment income you earned in a 529 account is tax deferred and tax free when it is distributed to pay qualified education expenses. Some states also offer tax benefit for their residents if they open a 529 account operated by the states. There is no tax filing requirement when you make contribution to a 529 account. However, if your distribution is more than the qualified education expenses you paid during any tax year, you will need to calculate the taxable amount and include it as income on your tax return. Therefore, it is important for you to know how much qualified education expenses you will incur and determine the amount of distribution each year if you don’t want to pay tax due to any excess distribution.

Step 1: Determine or estimate total qualified education expense.

According to IRS Publication 970, qualified education expenses include the expenses listed below and are paid for the designated beneficiary for attending at an eligible education institution.

1. Tuition and fees.
2. Books, supplies and equipment.
3. Cost of computer equipment if it is required for enrollment or attendance at an eligible institution.
4. Expenses for room and board for students who are enrolled at least half-time.
5. Expenses for special needs services by a special needs beneficiary.

Step 2: Calculate your adjusted qualified education expenses.

Reduce the total qualified education expense calculated on step 1 by any tax-free education assistant, such as tax-free scholarship and fellowships, and expenses taken into account in figuring American opportunity credit or life time learning credit. This amount is your adjusted qualified education expenses.

Step 3: Make your distribution equal or less than the adjusted qualified education expense calculated from Step 2.

For more information about 529 plan, please see IRS Publication 970.



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