529 Plans: Which Expenses are Qualified? (Script)

08/01/2011

QUESTION:
Dear Joe, The professor says the students will be reading books X, Y and Z for my daughter's English class and writing essays about them. She buys these books on Amazon.com. Are they qualified expenses for her 529 plan?

--Renee

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ANSWER:
Sounds to me like they are qualified expenses because those books are required by the professor as part of the class. It doesn’t matter where the books are purchased from. If your daughter buys them on Amazon using a credit card, you can simply request a distribution from your 529 plan for the same amount, payable to your daughter as beneficiary.

Any books, supplies, or equipment that are not required to attend the college are not qualified expenses. The one area that creates a lot of confusion concerns computers. Of course, your child will need a computer of some sort at college, but the college may not require that its students have a computer. If it’s not required of all students, then it’s not a qualified expense. Congress provided an exception for computers back in 2009 but that particular provision expired at the end of 2010. I wouldn’t be surprised to see it voted back in on retroactive to the beginning of 2011, but I can’t make any guarantees.

You should note that books and other course expenses also qualify for the American Opportunity tax credit. You max out on the $2,500 credit once you reach $4,000 in eligible expenses, and so if your daughter does not pay at least $4,000 in tuition, then it will be important to include the cost of books until the $4,000 total is reached.

Any expenses that go towards the American Opportunity credit, whether you are talking about tuition, fees, or books and equipment, must be backed out when you calculate how much you can take tax-free from your 529 plan. This is the so-called anti-double-dipping rule. But even if you end up double-dipping, and part of your 529 distributions become taxable, you will not be subject to the 10% penalty tax.

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