What form or documents are required by the IRS when using money from a 529 education savings accounts for my daughter’s college expenses?
As long as the amount withdrawn from the 529 plan is used entirely for qualified expenses, nothing is required to be reported on your tax return and there is no form that needs to be completed. Qualified expenses generally include tuition, fees, books, supplies, computers, and, for students enrolled at least half-time, room and board. You just need to keep the appropriate documentation in case the IRS would ask you for support. The IRS has been known to occasionally send notices or to assess tax on 529 distributions, particularly if there is a large 529 plan distribution in one year. Documentation would include cancelled checks, paper or electronic receipts, as well as student account records maintained at the school, which show the actual tuition payments that have been made for the student who is the 529 plan beneficiary.
If you don’t use all of the distribution for qualified expenses, you have to include the portion of earnings not used for qualifying expenses as taxable income on Line 21 of Form 1040. When you take a non-qualified withdrawal, you also have to pay a 10 percent early withdrawal penalty on the taxable portion of the distribution, unless an exception applies. The penalty is reported on Form 5239 as well as on Line 58 of Form 1040.
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Answered by: Daria D. Palaschak, CPA, is a tax partner with Sisterson & Co. LLP in Pittsburgh, Pa.