Probably not, but I'll ask.

[SecondCor521]

Hi all,

I find myself in the situation where I think I have more money in my kids' college accounts (ESAs and 529s) than they will likely need. I therefore would like to make qualified tax-free distributions for anything and everything that can qualify.

I already make qualified tax-free distributions for things that I know fall within the normal bounds of the law.

I also generally am aware of the ability to transfer leftover amounts to relatives.

I also know about the provision for scholarships, which I will probably use if needed.

Finally, my question:

My daughter attends a private Catholic high school. Every spring, her orchestra teacher organizes a school music trip that includes kids from the orchestra, choir, and band. The trip is optional. The kids travel somewhere, do some music-related educational activities (like record their own tracks in a professional sound recording studio), and do some sightseeing. The orchestra and band teacher lead the trip. Some kids' parents probably chaperone. Each kid and/or kids' family pays money for their kid to go; the money covers everything in the trip - food, hotel, transportation, and educational program.

If I make a distribution from my daughter's ESA for this trip and claim it is a qualified educational expense, do you think this meets the IRS' rules?

Probably not, but I thought I'd ask.

 

[aaronc879]

It's optional, so no. It has to be required for enrollment or attendance. Check out Publication 970 page 13.

 

[SecondCor521]

Thanks, aaronc879.

Page 13 of Publication 970 is in the section about the American Opportunity Credit, Chapter 2.

I'm questioning a withdrawal from her ESA. The ESA chapter 7 starts on page 38.

 

[ivinsfan]

What are you risking if you claim it in error? Just wondering.. if you claim it in good faith,what would be the downside? It's a school sanctioned trip with activities related to a class, so I'd probably go for it.

Would a year in a study abroad program be covered by an ESA?

 

[kgtest]

I would do it. I went on a band trip to Prague, Vienna and Budapest. Our band teacher went way above and beyond, I think we even produced a holiday CD.


My dad paid for it with his brokerage profits during the 2000 .com runup. I distinctly remember him coming home way day and stating
"Well son I paid for your band trip today..." I remember being like wait I've been doing all this fundraiser stuff, selling wreathes, collecitng old newspapers, etc.


He said "you don't need to do that anymore, I paid for it!"


Man what a relief. Then he gave me his Visa to use while I was there..man was that his mistake

 

[SecondCor521]

What are you risking if you claim it in error? Just wondering.. if you claim it in good faith,what would be the downside? It's a school sanctioned trip with activities related to a class, so I'd probably go for it.

Would a year in a study abroad program be covered by an ESA?

I can't claim it in good faith unless I believe it to be within the law. I've read the law (well, the IRS instructions) and am not sure whether I believe it to be within the law.

From a practical point of view, very little. There are no reporting requirements for qualified ESA withdrawals and no matching that the IRS can do, and I've never been audited and with my tax return statistics am very unlikely to be audited. Finally, if audited and it were disallowed, I'm sure I could claim it as an honest mistake, and the IRS would just have me pay taxes and interest.

But all that being said, I still try to do my taxes in such a way that I believe I'm doing them right.

Thanks to both of you for the additional replies!

 

[cathy63]

I think you can make an argument for paying for it out of the ESA. According to Pub 970 (bolding mine):

2. The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school.
a. Room and board.
b. Uniforms.
c. Transportation.
d. Supplementary items and services (including extended day programs).

This sounds like a supplementary service provided by the school which is only offered to those who are enrolled. The example the IRS gives of extended day programs demonstrates that it does not need to be a required event in order to be a qualified expense. I would limit the withdrawal to the amount that you can document as being paid directly to the school for the trip, i.e. any meal money or other spending money she carries in cash should be excluded.

 

[ivinsfan]

I think you can make an argument for paying for it out of the ESA. According to Pub 970 (bolding mine):



This sounds like a supplementary service provided by the school which is only offered to those who are enrolled. The example the IRS gives of extended day programs demonstrates that it does not need to be a required event in order to be a qualified expense. I would limit the withdrawal to the amount that you can document as being paid directly to the school for the trip, i.e. any meal money or other spending money she carries in cash should be excluded.

I'm going with cathy63 here as she has printed backup for the point I was making in my post. We have a good faith belief its qualified does that help?

 

[CRLLS]

I can't claim it in good faith unless I believe it to be within the law. I've read the law (well, the IRS instructions) and am not sure whether I believe it to be within the law.

From a practical point of view, very little. There are no reporting requirements for qualified ESA withdrawals and no matching that the IRS can do, and I've never been audited and with my tax return statistics am very unlikely to be audited. Finally, if audited and it were disallowed, I'm sure I could claim it as an honest mistake, and the IRS would just have me pay taxes and interest.

But all that being said, I still try to do my taxes in such a way that I believe I'm doing them right.

Thanks to both of you for the additional replies!

Look at it from another perspective. Do you "know" it to be a non-covered expense? I'm not suggesting cheating at any level. If it falls into an unclear, gray area, I'd take the benefit. If ever audited and/or questioned, you can say "I read the requirements and thought it was acceptable. Further, I found nothing to prevent me from using it" with a clean conscience.

 

[Bir48die]

I'm going against the grain here but I would say no. This is not critical to an extension of their basic learning. Also agree with a previous poster that being optional is partially key. If this was a study abroad then I'd say yes but not in this case.

 

[SecondCor521]

I think you can make an argument for paying for it out of the ESA. According to Pub 970 (bolding mine):



This sounds like a supplementary service provided by the school which is only offered to those who are enrolled. The example the IRS gives of extended day programs demonstrates that it does not need to be a required event in order to be a qualified expense. I would limit the withdrawal to the amount that you can document as being paid directly to the school for the trip, i.e. any meal money or other spending money she carries in cash should be excluded.

Thank you! I have no idea why I didn't see that before.

Also, I agree with just deducting the main expense, not the miscellaneous spending money and such.

@CRLLS and @ivinsfan, for me, I'd at least have to read the law or IRS rules and convince myself that there is a logical reading that makes the position I am taking plausible. In this case I can't just say, "Well, maybe it is, maybe it isn't, I'll claim it and let the IRS sort it out." I understand the grey area approach and will take it if I can convince myself that there's an argument for my position being right, but I feel obliged to at least get to that point.

 

[Sunset]

I'm going against the grain here but I would say no. This is not critical to an extension of their basic learning. Also agree with a previous poster that being optional is partially key. If this was a study abroad then I'd say yes but not in this case.

I think OP can claim it, and I disagree with your logic.
When is study abroad EVER mandatory ?
I think a person can get an education in Anything here in the USA, maybe it's not how they like to do it, or at the school they want, but the actual learning can be done here.

It seems to me, that study abroad is always optional, yet allowed so other optional things should be as well.

 

[ivinsfan]

I think OP can claim it, and I disagree with your logic.
When is study abroad EVER mandatory ?
I think a person can get an education in Anything here in the USA, maybe it's not how they like to do it, or at the school they want, but the actual learning can be done here.

It seems to me, that study abroad is always optional, yet allowed so other optional things should be as well.

That's why I used it as an example, in my DD's case the cost of one semester of study abroad would cover two semesters domestically, but student aid was offered to covered the study abroad costs.

 

[youbet]

If I make a distribution from my daughter's ESA for this trip and claim it is a qualified educational expense, do you think this meets the IRS' rules?

You would have to get an itemized bill detailing amounts for each activity. Some things are definitely not qualified, such as the travel. Some might be. If you insist on lumping it into a single package, an "educational trip," then nope, it's not qualified.

 

[aaronc879]

My understanding from reading it is the expense has to be required to gain entry to the school or stay in the school. This trip is optional and therefore not covered. That being said, I do believe you would not be penalized criminally.

 

[Bir48die]

I think OP can claim it, and I disagree with your logic.
When is study abroad EVER mandatory ?
I think a person can get an education in Anything here in the USA, maybe it's not how they like to do it, or at the school they want, but the actual learning can be done here.

It seems to me, that study abroad is always optional, yet allowed so other optional things should be as well.

Well I guess I stand corrected.

 

[ivinsfan]

You would have to get an itemized bill detailing amounts for each activity. Some things are definitely not qualified, such as the travel. Some might be. If you insist on lumping it into a single package, an "educational trip," then nope, it's not qualified.

is that your opinion? because it's a school sponsored activity in another city why wouldn't the travel be qualified? Seems like it should be one way or another can't split it up that like that either all or nothing.

 

[Philliefan33]

According to this link, 529 money can be used for secondary school tuition only:

https://thecollegeinvestor.com/18450/qualified-expenses-529-plan/

 

[ivinsfan]

It's an ESA...

 

[SecondCor521]

You would have to get an itemized bill detailing amounts for each activity. Some things are definitely not qualified, such as the travel. Some might be. If you insist on lumping it into a single package, an "educational trip," then nope, it's not qualified.

I don't insist on lumping it together, but that's how the bill comes - $XXX for the whole thing, including travel, hotel, food, and educational components. I could ask for an itemization but doubt they would be able to provide one.

 

[cathy63]

You would have to get an itemized bill detailing amounts for each activity. Some things are definitely not qualified, such as the travel. Some might be. If you insist on lumping it into a single package, an "educational trip," then nope, it's not qualified.

According to the IRS, a supplementary item or service provided by the school in connection with the student's attendance is a qualified expense for a Coverdell ESA. I posted the exact quote from pub 970 above. This section addresses Elementary and Secondary Education Expenses, which is OP's situation.

The IRS does not say that the supplementary item or service must be educational, nor do they say that the school has to require the student to participate.

I would say that a high school teacher organizing a trip and offering it through the school is a supplementary service, and it's connected to attendance because it's only available to students who are enrolled at and attend that school. Therefore, all the costs of that trip that are paid to the school should be qualified.

Note that if a college teacher offered the exact same trip to her students, then it would not be a qualified expense because the definition of qualified expense for Higher Ed is different and does not include the "supplementary item or service" language.

 

[Bir48die]

So out of all of these responses, I'd like to know how many people are CPA's trained in tax law. Just curious

 

[SecondCor521]

According to the IRS, a supplementary item or service provided by the school in connection with the student's attendance is a qualified expense for a Coverdell ESA. I posted the exact quote from pub 970 above. This section addresses Elementary and Secondary Education Expenses, which is OP's situation.

The IRS does not say that the supplementary item or service must be educational, nor do they say that the school has to require the student to participate.

I would say that a high school teacher organizing a trip and offering it through the school is a supplementary service, and it's connected to attendance because it's only available to students who are enrolled at and attend that school. Therefore, all the costs of that trip that are paid to the school should be qualified.

Note that if a college teacher offered the exact same trip to her students, then it would not be a qualified expense because the definition of qualified expense for Higher Ed is different and does not include the "supplementary item or service" language.

Thanks, Cathy.

I would like to emphasize your last paragraph above. There are generally "education" oriented accounts, and "education" oriented tax deductions and credits. But the rules for what expenses qualify vary between them as your example shows. There are also interactions between them - as a basic example, to qualify for the AOTC, the funds used must be out-of-pocket and cannot be reimbursed from a 529. It can get complicated, which was part of the reason for my post.

 

[ivinsfan]

So out of all of these responses, I'd like to know how many people are CPA's trained in tax law. Just curious

Probably none of us, but we work for free...

 

[FlaGator]

I paid for my musician kids' upgraded instruments from their ESAs after consulting with my CPA.

If the audit risk is low anyway, I wouldn't have a concern about paying for the trip from an ESA. The rules on 529s are more restrictive (private tuition or post-secondary only), so I'm holding those funds for expenses clearly within the rules.

Your decisions years ago have set your kids up well, and it's a great situation to be in. I don't miss an opportunity to remind mine what their mother and I did for them at an early age