529 Plans: Which Expenses are Qualified? (Script)


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 Are they qualified expenses for her 529 plan?


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Sounds to me like they are qualified expenses because those books are required by the professor as part of the class. It doesnt 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. Please note that computer equipment and related technology and service expenses, such as internet access fees and peripheral equipment, are now considered qualified expenses as a result of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

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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