Can 529 funds be used to purchase an instrument that is required for classes at a conservatory? How about repairs to an instrument?
To receive the benefit of using 529 plan funds tax free, the funds must be used to pay for qualified higher education expenses or qualified elementary and secondary education expenses for a designated beneficiary. Prior to the Tax Cuts and Jobs Act (TCJA), elementary and secondary education expenses were not an eligible expense.
The IRS defines postsecondary school to generally be any accredited public, nonprofit, or proprietary college, university, vocational school, or another postsecondary educational institution. In addition, the institution is required to be eligible to participate in a student aid program administered by the U.S. Department of Education. Typically, the education institution can confirm whether or not it is eligible. After the TCJA passed, any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12) is considered an eligible elementary or secondary school as determined under state law.
Qualified higher education expenses can be for various items, and some of the wording is up to interpretation. The items must be required by the school, and incurred by students who are enrolled at least half-time. Tuition, fees, books, supplies, and equipment can qualify. In addition, the purchase of computer or peripheral equipment, computer software, internet access, and related services that are used by the beneficiary while at an eligible postsecondary school is allowed. The software must predominantly be educational in nature. Based on this information, if the instrument and the costs associated with the upkeep of the instrument are exclusively for educational interests, the cost may qualify as a qualified education expense.
As the facts and circumstances of each situation are different, you should consult with a tax adviser prior to using funds for an expense you are unsure is eligible. Even more important, you must maintain the proper records in the event that you are selected for audit. If taxpayers are not able to substantiate their deductions, there is a high probability of it being disallowed under audit.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: Christopher R. Cicalese, CPA, MSTFP, is a manager at Alloy Silverstein Shapiro Adams Mulford Cicalese Wilson & Co. in Cherry Hill, N.J.