529 Plans and your Tax Return

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Kathryn Flynn

By Kathryn Flynn

March 9, 2023

Tax season is well under way, and many of us have been spending the past few weeks getting our financial records in order. When you dig out last year’s tax return filing, you’re relieved to see that almost everything looks the same this year. But what about your 529 plan contributions? Do your college savings need to be reported to the IRS?

While 529 plans are relatively low-maintenance savings vehicles, there are times when account activity will need to be included on your tax return. Here are some things you might need to do this tax season if your family has a college savings plan:

1. Sit back and relax

If you’ve simply been contributing to an existing 529 account you may not have to report anything on your federal income tax return. Unlike an IRA, contributions to a 529 plan are not deductible and therefore do not have to be reported on federal income tax returns. What’s more, the investment earnings in your account are not reportable until the year they are withdrawn. 529 plans save taxpayers billions of dollars on their income taxes.

Perhaps you took a distribution last year and received a Form 1099-Q from the plan – does this mean you have to report the earnings? It depends on what the withdrawal was used to pay for. If the funds were spent on qualified education expenses or rolled into another 529 plan you don’t have to report anything. However, 529 funds spent on purchases that do not fall into one of these two categories will be considered taxable withdrawals.

2. Report any taxable 529 plan withdrawals

Qualified education expenses include tuition, fees, books, computers and related technology and some room and board costs for students attending an eligible college or university. Families can also take a tax-free distribution to pay for tuition expenses at private, public and parochial elementary and high schools. This amount is limited to $10,000 per year, per beneficiary. The SECURE Act of 2019 expanded the definition of qualified 529 plan expenses to include costs of apprenticeship programs and student loan repayments. Qualified distributions for student loan repayments have a lifetime limit of $10,000 per beneficiary and each of their siblings. 

529 withdrawals spent on other purchases, such as transportation costs or health insurance coverage are generally considered non-qualified. In rare cases, these expenses are considered qualified only if the college charges them as part of a comprehensive tuition fee, or the fee is identified as a fee that is “required for enrollment or attendance” at the college . 

If you made non-qualified purchases last year, you will need to review your 1099-Q, which breaks out the basis portion and the earning portion. The earnings portion of a non-qualified withdrawal will be subject to income tax and a 10% penalty. The basis portion will never be taxed or subject to penalty because it is made up with the amount you originally contributed with after-tax dollars. 

Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need.

3. Report 529 plan contributions above $16,000 on your tax return

In 2022, 529 contributions up to $16,000 for individuals or $32,000 for married couples filing jointly qualify for the annual federal gift tax exclusion. This limit will increase to $17,000 in 2023. Sometimes, for estate planning purposes or other reasons, families will make contributions that exceed this amount. When that happens, you are able to take an election on your gift tax return to spread your contribution over five years. This will allow you to make contributions up to $80,000 ($160,000 for married couples filing jointly) without generating a taxable gift. You will have to file IRS Form 709United States Gift (and Generation-Skipping Transfer) Tax Return, if your contributions exceed the $16,000 annual gift tax exclusion.

Keep in mind that the annual gift tax exclusion will increase to $17,000 in 2023.

4. Report 529 plan contributions on your state income tax return

If you use a 529 plan and pay state income tax, you may be eligible for an additional benefit. Currently, over 30 states including the District of Columbia offer a full or partial tax credit or deduction on 529 plan contributions. Most states only offer this benefit to residents who use their home state’s plan, but residents of Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania offer taxpayers a state income tax deduction when they contribute to any state’s 529 plan.

5. Use your tax refund wisely

If you’re expecting a tax refund check this year, it can be tempting to take a lavish vacation or go on a spending spree. But wouldn’t you rather invest in your child’s future? This year, give your refund a chance to grow by depositing it into a 529 plan account. An upfront lump sum contribution is more likely to benefit from potential market gains over the long-term than smaller recurring contributions.

But why stop there? You can deposit your tax refund and continue to keep on saving throughout the year. Many 529 plans offer affordable monthly contribution limits as low as $25 that can be automatically deposited straight from your checking account.

A good place to start:

See the best 529 plans, personalized for you

A good place to start:

See the best 529 plans, personalized for you