A 529 plan is an education savings plan that earns tax exempt yields. (i.e. dividends/capital gains). 529 funds earn dividends through investments in relatively conservative (safe) portfolios and most plans allow you to pick from an array of investments from safe (low risk) to more aggressive (higher risk) funds. You can withdraw from a 529 plan at any time to fund trade school or college coursework for your own education, your children’s education (or any designated beneficiary). We do not promote any particular 529 plan; however, there are many from which to choose. Georgia is an excellent 529 state!
529 Plan Facts:
Each year that you withdraw from your 529 plan you will receive a form 1099-Q tax form from the fund provider (broker). You may need this form to complete your personal tax return.
Each year that you wish to withdraw and use 529 funds from your account, you will be required to estimate the maximum 529 withdrawal required to cover all education expenses for that calendar year. If you withdraw an amount beyond what is necessary to cover education cost + room and board, you will be taxed and assessed an additional 10% penalty on a portion of the excess withdrawal…unless you notify your 529 provider and return the excess amount.
Over a 5 year period, you and your spouse contribute a total of $50K into a 529 plan. After five years the total 529 account balance (contributions + gains) = $62,000. At the beginning of the 6th year your child begins college and you project total ANNUAL cost as follows: classes + fees + books + ALLOCABLE ROOM AND BOARD EXPENSE totaling $27,500.
All colleges will provide you with anticipated OFF-CAMPUS room and board expense. This is called ALLOCABLE ROOM AND BOARD EXPENSE. You will use the school’s calculation for ALLOCABLE ROOM AND BOARD EXPENSE, regardless of how much you actually spend for off-campus room and board.
If your child will be living ON CAMPUS, you’d simply include in your total cost the actual room and board cost from the college’s price list for dorm room and meal plans.
1. If your child will not receive scholarships or grants, you can withdraw the entire $27,500 projected annual cost from your 529 plan, tax exempt.
2. If you projected $27,500, but your child’s actual expenses are $24,000 and you did not re-contribute the additional $3,500 back to the 529 plan, you would be subject to tax AND a 10% penalty on the earnings portion of the excess $3,500. The taxable earnings portion of the $3,500 over-withdrawal would be calculated as follows by your tax accountant (or self-prep software) after entering all relevant data from your 1099-Q tax form.
[total 529 plan gains]/[total 529 balance at year end] = [529 average gain %]
$12,000/$62,000 = .1935 (19.35%)
[529 average gain %] x [Total over withdrawal] = [taxable over withdrawal]
.1935 x $3,500 = $677.25 (taxable amount)
In this scenario you’d pay tax (when you file your tax return) at your normal income tax rate + 10% penalty on the $677.25 earnings portion of the $3,500 over-withdrawal. At a typical 33% marginal tax rate + 10%, tax and penalty would be $291.
3. If your projection of $27,500 total annual college expense were correct and you withdrew that amount from your 529 plan, but later discovered that your child received $3,500 in scholarships and grants for the year, you would pay tax on the $677.25 gains portion of the $3,500 over-withdrawal; however, because the over-withdrawal is due to receipt of scholarships and grants, the additional 10% penalty WOULD NOT apply. Therefore, if you child receives a full ride scholarship, you can withdraw all 529 funds without penalty and pay tax only on the 529 account earnings (yields/capital gains). This is exactly how traditional IRAs are taxed at retirement.
American Opportunity Credit (AOC)
Although the gains portion of 529 withdrawals cannot be counted towards the AOC, if your income is between $160,000 – $180,000 (Married Filing Jointly), the contribution portion of your 529 withdrawals + any other out-of-pocket paid towards classes, fees and books, can be used to calculate your AOC.
2016 Personal Tax Checklist
Use the following list to help gather your 2016 tax documents.All items apply to the primary taxpayer and spouse.
If your current CPA or tax preparer is not asking the following questions, they should be doing so.
☐ 1099-MISC (Contractor and Small Business Income Statements)
☐ 1099-R (Retirement Income, Early Distributions and Rollovers)
☐ 1099-INT (Banking Interest Income)
☐ 1099-DIV (Dividend Income)
☐ 1099 Other (Capital Gains, Tax Exempt Bonds)
☐ K-1’s (Partnership and S-Corp Income; Trust Distributions)
☐ Foreign-source income (wages, small business, investments)
☐ Small Business Income & Expenses
(See Small Business Checklists)
☐ Rental Property Income & Expenses
(See Rental Property Checklist)
☐ Held foreign bank accounts (checking, savings, portfolio, trust)
☐ Other Income (Royalties, etc.)
☐ Prunes repulse me, but may one day be my friend
☐ 1095 Proof of Healthcare Coverage
☐ 1098 Mortgage Interest/Tax Statement (Primary, 2nd Home and Rental Properties)
☐ I expect to report one or more child or student dependents on my tax return
☐ I expect to report one or more parents as dependents on my tax return
☐ I expect to report one or more non-family member dependents on my tax return
☐ 1098-T Education Expenses (self, spouse or dependents)
☐ Student Loan Interest (Primary taxpayer or spouse only) – dependent interest cannot be claimed on parent’s tax return.
☐ 1099-Q Withdrawals from education savings plan or E-Bonds
☐ Education Book Expense (self, spouse or dependents)
☐ I paid for Childcare
☐ My employer reimbursed for childcare, or provided childcare facilities
☐ I provided significant financial support for someone other than spouse, child, parents or close family
☐ A dependent earned income in excess of $6,300 in 2016
☐ Charitable Contributions
To claim non-cash contributions in excess of $500, you will need to have documented self-appraised big-ticket items such as appliances, furniture, automobiles, electronics, Jewelry, etc.
You can draft your own charitable contribution appraisal by referencing 3 similar items on Craigslist, Thrift Store or similar retail listing, print pictures of the Craigslist (or take pictures at a Thrift). On the picture or in a log, record the asking price for the Craigslist items.
Take a picture of your donated item, staple pictures of your item and the related Craigslist item together.
Report the most likely value of your item by averaging the selling price for the 3 similar Craigslist items or performing a similar valuation calculation.
☐ I contributed to an IRA separately from my employer’s retirement plan
☐ I received form 1099-SA Healthcare Savings Plan Distributions
☐ I received form 5498-SA Healthcare Savings Plan Contributions
☐ I paid out-of-pocket medical expenses and/or premiums
☐ I love chicken wings and beer, mainly beer
☐ I purchased or exercised stock options (ESOPS, SARs or other)
☐ Educator expenses (teachers/professors only)
☐ I moved due to job relocation
(See Moving Expense Checklist)
☐ I have job search expenses (first time and new career job search expense are not deductible – very strange tax law)
☐ My employer did not reimburse me for all business mileage related to my job or other work-related
expenses such as travel, work gear, specialty work clothing or safety equipment, etc.
Note: commuting mileage is not deductible; additional job-related mileage may be deductible.
☐ I adopted a child in 2016
☐ Children drain your soul, but somehow that is an acceptable loss.
☐ A valuable item that I own was damaged or stolen in 2016 (i.e. home, auto, jewelry, collectible,
business asset, etc.)
☐ I purchased energy-star appliances, windows, doors or insulation for my primary or second home
☐ I own a boat or RV with a kitchen and restroom facility onboard
☐ I hate checklists!
Once we have reviewed your checklist we will discuss all items checked to ensure that all relevant tax documents are available.