First Time Freshman Parents and 529 Savings Tax Benefits Tips
Photo Credit:Flickr/Siena College
You did the smart thing and started a 529 College Savings Plan for your child and now your kid is finally off to college. It’s time to start using that money and there’s a slight learning curve toward using it compliantly.
The IRS will be watching you closely when you file your taxes in April. Many parents make mistakes that end up costing them more money or putting them in jeopardy with the IRS. I’d like to help you avoid making some rookie mistakes and keep Uncle Sam off your back.
Only Qualified Expenses Are Allowed
For starters, it’s important to withdraw money from your 529 Saving only for “qualified or eligible education expenses”. Eligible expenses include tuition, books and supplies, room and board, and special equipment required by the school or class. Computers, tablets and peripherals such as printers and education software are also covered.
Expenses that Are Not Covered
Be careful claiming expenses that aren’t covered which include travel expenses to and from campus, campus logo items such as hats, mugs, sweatshirts, and computer games. Do yourself a favor – review and stick to the expenses outlined by the IRS. The IRS allows for educational expenses not expenses that display your kid’s school spirit.
Teach Your College Student to Save Receipts
You will be required to show the IRS that withdrawals from your 529 go toward eligible educational expenses. You’ll have to submit documentation in the form of receipts, canceled checks and other forms of payment. Before your child heads off to college have this discussion and make sure he or she understands the importance of documenting all expenses. As you’ll soon find out, if you haven’t already, privacy rules very often don’t allow parents to view bills and expenses from the university. Your child will be making many of the qualified purchases, but you will be responsible for any liability if your withdrawals exceed the qualified expenses or if you cannot substantiate the expenses.
The Most Common Freshman Parent Error: Tuition Payment Mistakes
Remember tax year vs. school year and you may avoid this very common mistake. Qualified expenses must align with withdrawals from your 529-account in the same tax year. If you withdraw 529-plan money in December for tuition the next semester—and don’t pay the actual bill until January (a new tax year)—you may find that you’ve exceeded your withdrawals for this year. In addition you might leave yourself short on money to pay for qualified expenses the next year. If you take money out of your 529 account to pay for next year’s tuition in the current year, make sure it is paid to and logged by the school’s Bursar’s office before the end of the current year.
Hopefully these tips will help you out at tax time and also give you an A+ for doing an equally great job paying for your child’s higher education as you have done saving for it.