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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?
- What are the federal income tax rules for 529 plan participants?
- How does the 529 plan administrator calculate the earnings portion of a distribution?
- Who reports any taxable earnings, the account owner or the beneficiary?
- What about state taxes?
- What are adjusted qualified higher education expenses?
- Can I claim the American Opportunity or Lifetime Learning credit in the same year that I withdraw from my 529 account to pay for college?
- How about the above-the-line deduction for qualified tuition and related expenses?
Can I claim the deduction for expenses I pay using funds from my 529 account? - Can I change the beneficiary of my 529 account?
- Can I transfer my account from one state’s 529 plan to another state’s 529 plan?
- Can I transfer the ownership of my account to someone else?
- Where do I show the beneficiary's qualified higher education expenses to the IRS?
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Ameriprise Financial instructions
Consult with your office/branch manager for instructions.
Commonwealth Financial instructions
Commonwealth Financial Advisors, you will find your Savingsforcollege.com portal on CommunityLink in the Financial Planning Playbook under Education Planning Tools.
LPL Financial instructions
Visit the Education Planning page in the LPL BranchNet Resource Center to access your Savingforcollege.com portal.
Morgan Stanley instructions
Visit Tools and Forms in the Education Savings Products page in 3DResources to access your Savingforcollege.com portal.
Raymond James instructions
Visit the 529 Plan Resource Center on RJ Net to access your Savingforcollege.com portal.
RW Baird instructions
Visit the 529 Department page on BairdWeb to access your Savingforcollege.com portal.