Join Early Retirement Today
Reply
 
Thread Tools Display Modes
529 room and board
Old 09-09-2020, 02:25 PM   #1
Full time employment: Posting here.
 
Join Date: Dec 2017
Posts: 942
529 room and board

Hey. I Googled for this, but was not able to find a clear answer...

Daughter has a 529 plan, and will be a full-time (9 hours) grad school student, for an online degree (campus is in another state somewhere). Can she use 529 funds to pay for room and board (equivalence amounts set by the school, I imagine) if
a) she lives at home while taking the online classes and pays me room and board, or
b) she lives in a local apartment (not near the campus) while taking the online classes

Thanks!
__________________
FIREd at 59.5 on 2019-01-18
camfused is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-09-2020, 03:23 PM   #2
Thinks s/he gets paid by the post
njhowie's Avatar
 
Join Date: Mar 2012
Posts: 3,925
a) If she pays you room and board, then you will need to declare it as income.

b) I do not see anything which differentiates online vs. in-person, or that room and board can be paid with 529 funds if "close" to campus. The only requirement is that she be at least a half-time student.

Quote:
...(equivalence amounts set by the school, I imagine)
That is correct.
njhowie is offline   Reply With Quote
Old 09-09-2020, 03:29 PM   #3
Full time employment: Posting here.
 
Join Date: Dec 2017
Posts: 942
^^^^ Thanks. For a), I have read that *maybe* that is not income, but either 1) can be a "gift" (which is ok for up to $14K/year, or whatever the gift limit is this year), or 2) if I charge her the cost of actually housing and feeding her, my net is 0, and therefore no income. What do we think?
__________________
FIREd at 59.5 on 2019-01-18
camfused is offline   Reply With Quote
Old 09-09-2020, 04:02 PM   #4
Thinks s/he gets paid by the post
njhowie's Avatar
 
Join Date: Mar 2012
Posts: 3,925
Quote:
Originally Posted by camfused View Post
^^^^ Thanks. For a), I have read that *maybe* that is not income, but either 1) can be a "gift" (which is ok for up to $14K/year, or whatever the gift limit is this year), or 2) if I charge her the cost of actually housing and feeding her, my net is 0, and therefore no income. What do we think?
1) Meaning she gifts you the room and board money? From the 529 funds? Not going to fly.

2) This is possible, but will get tricky, as it is similar to the home office expense/deduction. I would read up on how folks go about doing that as I believe the calculations would be similar. You'll be taking a pro-rated amount of the monthly housing expenses and allocating to her. If you go this route, be sure to keep good documentation in the event you have to show what you've done if the IRS questions it.
njhowie is offline   Reply With Quote
Old 09-09-2020, 04:20 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,863
The authoritative answer is in Pub 970 at the IRS website. In their parlance, a 529 is a Qualified Tuition Plan (QTP) which is discussed in Chapter 8. To determine whether a withdrawal is taxable, look on page 58, left column. Room and board while not living on campus is item 3a in that list. As njhowie notes and Pub 970 confirms, your daughter would need to be at least half-time as determined by her school.

What I do is call or visit the school and ask them for the cost-of-attendance (COA) for that semester for room and board. Note that the COA number the university provides may depend on what they have listed as the living arrangement of the student - my son's university has "living off campus in an apartment" COA, and "living at home with parents" COA. Since my son lives with me, I use the latter number.

Currently my son doesn't pay me anything for the food/shelter/utilities/etc because he's in school full-time and that's our agreement. But at times in the past when he has paid me for that, I do not include it as income because I don't consider it rent. It is not rent because (a) we have no rental agreement, (b) I don't charge late fees, and (c) if he didn't pay it I would not kick him out or stop feeding him. So I disagree with njhowie's opinion on this one.

https://www.irs.gov/pub/irs-pdf/p970.pdf
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 09-09-2020, 04:33 PM   #6
Thinks s/he gets paid by the post
njhowie's Avatar
 
Join Date: Mar 2012
Posts: 3,925
Quote:
Originally Posted by SecondCor521 View Post
Currently my son doesn't pay me anything for the food/shelter/utilities/etc because he's in school full-time and that's our agreement. But at times in the past when he has paid me for that, I do not include it as income because I don't consider it rent. It is not rent because (a) we have no rental agreement, (b) I don't charge late fees, and (c) if he didn't pay it I would not kick him out or stop feeding him. So I disagree with njhowie's opinion on this one.

https://www.irs.gov/pub/irs-pdf/p970.pdf
If he's not paying you anything, then there are no room and board expenses and so you are not making a qualified withdrawal from the 529.

Is this where the gifting camfused brings up comes into play? In the other direction?

I think this line of reasoning is weak. However, as I mentioned elsewhere on a 529 thread, as long as you're not doing something incredibly wrong/bad, it's extremely unlikely that anything would ever come of it. The IRS simply does not have the resources to verify every 529 withdrawal and confirm where the funds actually went. So, at the end of the day, if you are comfortable with what you are doing, keep good documentation, and can justify what you've done in the unlikely event you are audited, then that's all that matters.
njhowie is offline   Reply With Quote
Old 09-09-2020, 04:44 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 10,308
My attitude on most questions like this is to remember what my tax CPA once told me: "If you never get audited, you're not trying hard enough." Actually, I have never been audited even when he was helping me try.

So I say just stretch the rules any way that you can reasonably interpret them, then wait to see if you get audited. And wait. And wait. The audit rate for individual taxpayers is something like 0.5%, so one chance in 200. If you are reporting exotic stuff, maybe it's higher. But a 529 is hardly exotic.
OldShooter is offline   Reply With Quote
Old 09-09-2020, 05:01 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Location: South central PA
Posts: 3,466
Publication 970 refers to qualified educational expenses for a tax deduction and does not apply here. Educational expenses deduction applies only to the first four years of higher education, and only applies to tuition and fees.

Grad school is full time with 8 semester units or more, so you're fine. I initially thought your idea couldn't work, but apparently, it does. The second paragraph if the previous post by SecondCor521 is accurate, IMO.

According to the website, Saving For College, "Colleges typically have a room and board budgets for students who live on campus in college owned or operated housing, for students who live off-campus in an apartment and for students who live off campus with their parents or other relatives."

https://www.savingforcollege.com/art...room-and-board

Then if she gave you the COA amount as a gift, there should be no tax consequence. Agree with checking with the school regarding the "living with relative" allowable amount. Since this is a gift, you do not need to report income. You may want to have her write a letter stating she is giving you the gift, and keep it, along with the COA amount by the school together in your files in case the IRS comes knocking.
EastWest Gal is offline   Reply With Quote
Old 09-09-2020, 05:08 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,863
Quote:
Originally Posted by njhowie View Post
If he's not paying you anything, then there are no room and board expenses and so you are not making a qualified withdrawal from the 529.

Is this where the gifting camfused brings up comes into play? In the other direction?

I think this line of reasoning is weak. However, as I mentioned elsewhere on a 529 thread, as long as you're not doing something incredibly wrong/bad, it's extremely unlikely that anything would ever come of it. The IRS simply does not have the resources to verify every 529 withdrawal and confirm where the funds actually went. So, at the end of the day, if you are comfortable with what you are doing, keep good documentation, and can justify what you've done in the unlikely event you are audited, then that's all that matters.
I had read pub 970 quite a lot, and was going to write a spirited defense of my position, but in reviewing the relevant section I had missed the phrasing at the beginning of the paragraph in 3a where it says "Expenses for room and board must be incurred by students..."

Certainly one could argue that he has "incurred" expenses because he's eating food, which costs money. The board question is a little more ambiguous, as he's living in my house, which I owe outright. But I do pay electricity/water/gas/sewer/trash, which are actual expenses and things he uses. And as mentioned above, in neither case do I charge him for any of these things. What I don't know is whether the portion of those costs which I could reasonably allocate to him - which would be an accounting hassle - are equal to, less than, or greater than the COA.

I'm not sure I understand your comment about camfused and gifting. I do think a lot of gifting goes on within families in all directions.

I agree with your last paragraph, and I have always said in addition to what you wrote, that I am willing to go into an audit, explain my position, have them tell me I'm wrong, learn from my mistake, and pay whatever penalties and interest they say to pay. I generally hope that if I have read the rules carefully, made an honest effort to apply them to my situation, and keep good records, I at least will not get thrown into prison.

I'll have to revisit my practices. Thanks for the response.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 09-09-2020, 05:55 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Mar 2013
Location: Coronado
Posts: 3,655
Quote:
Originally Posted by OldShooter View Post
My attitude on most questions like this is to remember what my tax CPA once told me: "If you never get audited, you're not trying hard enough." Actually, I have never been audited even when he was helping me try.

So I say just stretch the rules any way that you can reasonably interpret them, then wait to see if you get audited. And wait. And wait. The audit rate for individual taxpayers is something like 0.5%, so one chance in 200. If you are reporting exotic stuff, maybe it's higher. But a 529 is hardly exotic.
I would just like to point out that there are other ways for the IRS to question your tax return than by auditing you. We did get questioned on a 529 withdrawal one year because I made a completely unrelated error entering a corrected W-2.

It turns out that if the IRS computer spits out your return because of a mismatch on one document, then they look at the entire thing and send you a letter telling you what they have "corrected". So we got: "We owe you $x for this W-2 you entered incorrectly, and you owe us $y for not reporting this taxable 529 withdrawal, plus $z penalties. Please sign here and send a check for $y-$x+$z." We had a 1098-T for more than the 529 withdrawal, so not a big deal to write a letter explaining they were wrong on the 529 and still get the refund on the W-2.

But I'd say if you're going to stretch the rules in one way, do try extra hard to avoid drawing attention to your return for some other reason!
cathy63 is offline   Reply With Quote
Old 09-09-2020, 07:49 PM   #11
Recycles dryer sheets
 
Join Date: May 2014
Posts: 67
For UC Berkeley, qualified 529 housing expenses when living with relative is $2704 "housing and utilities" ($10,868 in off campus apt), and $3808 food. It seems reasonable to me that qualified 529 withdrawals in these amounts can be claimed to IRS, with no tax liability to the host relative, as these would be actual expenses paid to the utility company or grocery stores. This is an interpretation suitable for me, others may have different or more knowledgeable interpretations. Perhaps scale it down by 20% for food and utilities only.

For us the actual tax implications are rather minor though. For $6k of non-qualified withdrawal, approx $2k of this are gains that would be taxable, and at 10-12% tax rate for the student, the actual tax is $220. Of course the gains and tax rates are unique to each case, but the actual tax may not be especially significant.
skibum is offline   Reply With Quote
Old 09-09-2020, 09:40 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,863
Quote:
Originally Posted by skibum View Post
For us the actual tax implications are rather minor though. For $6k of non-qualified withdrawal, approx $2k of this are gains that would be taxable, and at 10-12% tax rate for the student, the actual tax is $220. Of course the gains and tax rates are unique to each case, but the actual tax may not be especially significant.
I thought non-qualified withdrawals were subject to income tax and a 10% penalty (unless the withdrawal qualified for an exemption to the 10% penalty), so in the case you describe, it would be the $220 in tax plus $200 in penalty. Too lazy to look it up now, and my kids have plenty of scholarships to qualify for an exemption to the 10%. Just have to keep track.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 09-09-2020, 11:05 PM   #13
Recycles dryer sheets
 
Join Date: May 2014
Posts: 67
My mistake, plus 10% penalty on earnings. We've exceeded the allowed costs by a few grand for most years, Turbotax calculated the taxes, it did not seem to amount to much, I must have overlooked the penalty calcs. I'll have to look back at the returns, and take a closer look at the exemptions to manage the residual 529 balances.
skibum is offline   Reply With Quote
Old 09-09-2020, 11:36 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,863
Quote:
Originally Posted by skibum View Post
My mistake, plus 10% penalty on earnings. We've exceeded the allowed costs by a few grand for most years, Turbotax calculated the taxes, it did not seem to amount to much, I must have overlooked the penalty calcs. I'll have to look back at the returns, and take a closer look at the exemptions to manage the residual 529 balances.
The penalty would show up on Form 5329.

There are a number of exceptions to the 10% penalty, but the most commonly used one is if the student received scholarships. I think the exceptions are listed in Pub 970 as well (yup, just checked, they're on page 60).
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 09-10-2020, 08:19 AM   #15
Moderator
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 10,622
I'd get the budget from the school for the type of student in question, withdraw the entire amount in one transaction (for the entire academic year, including spring semester) and move on with my life. You are not trying to "get away with anything". If the IRS asks, it will probably be a form letter. You'd send them whatever paperwork you have. And say you came up short of the total. So what. You refigure the tax. It's peanuts. The IRS isn't going to be interested in peanuts on a guy who's basically doing exactly what the law makers intended.
sengsational is offline   Reply With Quote
Old 09-10-2020, 09:22 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 10,308
Quote:
Originally Posted by cathy63 View Post
I would just like to point out that there are other ways for the IRS to question your tax return than by auditing you. We did get questioned on a 529 withdrawal one year because I made a completely unrelated error entering a corrected W-2.

It turns out that if the IRS computer spits out your return because of a mismatch on one document, then they look at the entire thing and send you a letter telling you what they have "corrected". So we got: "We owe you $x for this W-2 you entered incorrectly, and you owe us $y for not reporting this taxable 529 withdrawal, plus $z penalties. Please sign here and send a check for $y-$x+$z." We had a 1098-T for more than the 529 withdrawal, so not a big deal to write a letter explaining they were wrong on the 529 and still get the refund on the W-2.

But I'd say if you're going to stretch the rules in one way, do try extra hard to avoid drawing attention to your return for some other reason!
Sure, we've gotten those. IIRC was one for a missed 1099, so we paid up. Another was for a W-2 DW received due to her cashing some stock options --- not employment income. Making that one go away took quite a while and a couple of meetings at the local IRS office. A third one ended up with my paying my CPA to write a letter to the IRS explaining their own regulations to them.

But your experience really supports my point, that real audits are vanishingly rare and the type of 529 interpretations we are talking about here probably will not show up in the automated paperwork reviews that the IRS does. The paperwork reviews are very cost-effective; actual audits of ordinary taxpayers almost certainly are not. But you are certainly right that trying extra hard to not get zapped via a paperwork review is a good idea. Probably it's a good idea any time under the universal never-wake-a-sleeping-bear policy.
OldShooter is offline   Reply With Quote
Old 09-10-2020, 10:11 AM   #17
Recycles dryer sheets
 
Join Date: May 2014
Posts: 67
SecondCor521. Thanks for the correction and insights.

My eldest graduated college this year and I distributed the residual 529 funds as planned. I used turbotax to calculate a provisional return to estimate withholding as he entered the work force. I actually highlighted the 10% penalty on form 5329T line 8, approx $500 on $5k earnings from $15k non-qualified distribution. I must have blocked out the penalty in writing the initial post, glad my projection was correct. It pains me to eat the penalty on excess 529 funds, though it is a small fraction of the 529 tax free earnings.
skibum is offline   Reply With Quote
Old 09-10-2020, 12:33 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,863
Quote:
Originally Posted by skibum View Post
SecondCor521. Thanks for the correction and insights.

My eldest graduated college this year and I distributed the residual 529 funds as planned. I used turbotax to calculate a provisional return to estimate withholding as he entered the work force. I actually highlighted the 10% penalty on form 5329T line 8, approx $500 on $5k earnings from $15k non-qualified distribution. I must have blocked out the penalty in writing the initial post, glad my projection was correct. It pains me to eat the penalty on excess 529 funds, though it is a small fraction of the 529 tax free earnings.
If your eldest had any scholarships, you can avoid paying that $500. It is my interpretation of the rules that the IRS does *not* require that those scholarships were received this year; they could have been from your child's freshman year (when scholarships are more common). Again, see Pub 970 page 60 right hand column item 3a.

You'll still owe the income tax on the earnings portion.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 09-10-2020, 05:07 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,714
Quote:
Originally Posted by OldShooter View Post
My attitude on most questions like this is to remember what my tax CPA once told me: "If you never get audited, you're not trying hard enough." Actually, I have never been audited even when he was helping me try.

So I say just stretch the rules any way that you can reasonably interpret them, then wait to see if you get audited. And wait. And wait. The audit rate for individual taxpayers is something like 0.5%, so one chance in 200. If you are reporting exotic stuff, maybe it's higher. But a 529 is hardly exotic.
I supervised a guy who took this attitude. Unfortunately, he didn't have a "plan" in case the IRS came calling - which they did. He had been operating a small business (resale of some kind IIRC). So, since he (apparently - this is 2nd hand) had not kept business records very carefully, he had to "create" some, and had to purchase (at $2.50 each) copies of all of the checks he ran through his CU. Cost a small fortune. Long and short of it: He did stay out of jail, he did have to pay significant penalties, he did have to pay his back taxes. I'd say he got lucky (other than being audited, that is.) He wasn't worth a flip at w*rk for 6 months. It aged him (now, long since deceased, RIP).

My point, if there is one: If you're going to tempt the IRS to audit you, be sure you have a very good back up plan AND be ready, willing(?) and able to pay the piper. Just my 2 cents worth, so YMMV.
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is online now   Reply With Quote
Old 09-10-2020, 05:22 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 10,308
Quote:
Originally Posted by Koolau View Post
... My point, if there is one: If you're going to tempt the IRS to audit you, be sure you have a very good back up plan AND be ready, willing(?) and able to pay the piper. Just my 2 cents worth, so YMMV.
Which is exactly why I said "stretch the rules any way that you can reasonably interpret them." Then, if the IRS comes calling you have a credible opening position in negotiations. They can argue about your interpretation but cannot call you a criminal. Outright fraud, which is what you are talking about, is an entirely different matter.
OldShooter is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Chair of CFP Board’s Board of Directors Resigns mickeyd FIRE and Money 3 11-03-2012 01:19 PM
Pay down the mortgage (fund 529 later) or Fund 529 now? Math problem. bo_knows FIRE and Money 1 05-16-2012 03:24 PM
Cost Saving- Furnace & Central A/C v. Room Heater/Electric Blanket & Room A/CUnit-Fan nico08 FIRE and Money 4 01-08-2012 10:52 PM
into the room they come and go... tozz Other topics 16 08-30-2005 10:22 AM

» Quick Links

 
All times are GMT -6. The time now is 04:36 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.