529 withdrawal for private high school and financial aid

[workburnout]

I've searched online and am unable to find answers.

I own a GA 529 in my name, for my 13 year old niece who I have as beneficiary. She will be switching from public middle school to private high school next year.
The private GA high school is giving them several thousand dollars of financial aid, based on her parents income.

The school recalculates financial aid each year, based on any changes in income or financial situation.

I would like to use about $2500 per year, from the 529 I own, to pay for part of the next 4 years of her private high school.

I'm afraid this will affect their financial aid amount, after the first year of high school. I believe the $2500 is reported as income to them, though I'm not sure how that works or how it would be reported.

If I have my CPA report on my taxes it was used for private school, and then give the $2500 directly to my sister to pay for her daughter's school, how would it be reported as income on the Financial aid form?

If I paid the school directly from the 529, would that be worse than taking $2500 from the account and giving it to my sister who would then pay the school?

Should I switch the 529 plan owner from me to my sister, in order to limit the lowering of their financial aid?

What is the best way to give my niece the money for school, without having it taxed and without harming her last 3 years financial aid?

Has anyone had a similar situation?

 

[joeea]

What is the best way to give my niece the money for school, without having it taxed and without harming her last 3 years financial aid?

use the entire amount to pay for the fourth year of her schooling.

 

[cathy63]

If you use the 529 withdrawal to pay for a qualified expense, then you do not report it on your federal tax forms. So for tax purposes, it doesn't really matter whether you pay the school directly or give your sister money and she pays the school. You definitely need to get a receipt that shows the account beneficiary's name and a tuition amount greater than or equal to the amount you withdraw though. When the 529 plan issues a 1099-Q, the IRS may send you a letter telling you how much tax you owe since they'll just assume the money was used for non-qualified expenses. You can then send in the receipt as proof that the expenses were qualified. This happened to us once in five years, and it was at the same time there was an actual error on our return, so it may never happen to you.

For the effects on financial aid, are they using the same FAFSA as is used for higher ed? This seems unlikely since there are no student loans or federal financial aid programs for private high schools. Or is it a form the school developed? I can't think of any government paper trail that would automate the reporting of your gifts to the daughter as income to the parents and it definitely won't show up on their tax returns either. The school may just rely on the parents to self-report, or it may not even ask about tuition assistance received from family members. You should ask your sister about how financial aid works at that specific school and maybe get a blank copy of the form they filled out so you'll know what they're asking.