I recently withdrew funds from an account that must be used for school expenses. They said they were sending me a check, but I have to prove that the funds are being spent on education and related expenses, otherwise it is subject to income tax. Would I be able to buy a new computer with my own money, and then replace it with the funds from the school account? If so, how do I prove that this was a school expense?
My answer assumes that the account you’re referring to “that must be used for school expenses” is a 529 plan account. According to IRC Section 529, “expenses for the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if such equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.” You can use your own funds to purchase a computer and then reimburse yourself with the funds from that account, since the IRS looks at the total distributions and total expenses on an annual basis. As long as you have detailed receipts supporting the computer purchase or computer-related expenses, this should be adequate. I do not believe that the IRS would dispute the computer being a school expense because in this day and age a computer is needed for most college classes. You could keep copies of course outlines pointing to the need for a computer, or ask the college for a statement indicating a computer is required if you want something to further support the computer purchase.
Answered by: Daria D. Palaschak, CPA, is tax manager with Sisterson & Co. LLP in Pittsburgh, Pa.