Income tax center

Who reports any taxable earnings, the account owner or the beneficiary?

[Excerpts from Chapter 3 of The Best Way to Save for College – A Complete Guide to 529 Plans (2014-15 Edition)]

Form 1099-Q will be issued in the name and social security number of the recipient of the distribution (in tax parlance, the "distributee"). In most 529 savings programs, that can be either the beneficiary or the account owner. The recipient is responsible for the proper reporting of the distribution, and for any resulting tax (including the 10 percent additional tax). The account owner selects the recipient when filling out the program’s withdrawal request form. Distributions paid directly from the 529 plan to the school are treated as paid to the beneficiary for reporting purposes.

Example: Mr. Brown establishes an account with a 529 plan for his daughter Kelly and makes a one-time contribution of $10,000. Five years later, once Kelly has started college and the account has grown to $15,000, Mr. Brown requests a $9,000 distribution from the account made payable to Kelly. Kelly will receive a Form 1099-Q after the end of the year showing $9,000 in total distributions with $6,000 as the basis portion and $3,000 as the earnings portion. The basis portion is two-thirds of total distributions, as determined by the ratio of the account’s basis at the time of distribution ($10,000) to total account value ($15,000). If Kelly can show that she incurred at least $9,000 of adjusted qualified higher education expenses during the year, the entire distribution is tax-free. If Kelly can only show $5,000 of AQHEE, then 5/9ths of the $3,000 earnings portion will be tax-free and 4/9ths, or $1,333, will be subject to tax on Kelly’s federal income tax return as ordinary income. She will also incur a 10% additional tax ($133).

Next: What about state taxes?