Was this article helpful?

Close

529 plans and your tax return

Kathryn FlynnBy: Kathryn Flynn | 


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 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 tax return. Unlike an IRA, contributions to a 529 plan are not deductible and therefore do not have to be reported. What's more, the investment earnings in your account are not reportable until the year they are withdrawn. Yet perhaps you did take 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.

Find your 529 plan - Select your state below

Did you know that residents are not limited to investing in their own state's plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state's plan and other options.

ALAKAZARCACOCTDEFLGAHIIDILINIAKSKYLAMEMDMAMIMNMSMOMTNENVNHNJNMNYNCNDOHOKORPARISCSDTNTXUTVTVAWAWVWIWYDC

Find a 529 Plan. Select your state below.

Did you know that residents are not limited to investing in their own state’s plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state’s plan and other options.


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. 529 withdrawals spent on other purchases, such as transportation costs or student loan repayments, are considered non-qualified. 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 money.

As of January 1, 2018, 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.

3. Report 529 plan contributions above $14,000

In 2017, 529 contributions up to $14,000 for individuals or $28,000 for married couples filing jointly will qualify for the annual federal gift tax exclusion. 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 $70,000 ($140,000 for married couples filing jointly) without generating a taxable gift. Keep in mind that the annual gift tax exclusion has been raised to $15,000 for 2018.

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, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer taxpayers a deduction when they contribute to any state's 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. Or, let's face it - we can easily waste a good amount of money entertaining our little ones. But before you plan an impromptu trip to a theme park or buy front row tickets to Disney on Ice, consider giving your refund a chance to grow by depositing it into a 529 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? We encourage you to 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.

Originally Posted: 2015-03-18, Updated: 2018-02-22

Earn cash back for college with Upromise. It's free to join.

Kathryn Flynn

Kathryn Flynn

Content Director

Kathryn is Content Director at Savingforcollege.com. She has been quoted in financial publications including the Wall Street Journal, the NY Times, Fortune, Money and GOBankingRates, and has been an expert guest on personal finance podcasts. Prior to Savingforcollege.com, Kathryn worked in product marketing at Henderson Global Investors (now Janus Henderson Investors), a global asset manager. She earned her MBA with Finance Concentration from DePaul University's Kellstadt Graduate School of Business, and has prior FINRA Series 7 and 63 licenses. Kathryn has 529 college savings plans for each of her three children, and enjoys creating content to help other families prepare for future higher education costs.