06 Mar How to report college money on tax returns

Q. I’ll be doing my grandson’s taxes this year. He goes to college and worked last summer earning a salary. His mom withdrew funds from his 529 savings account and from a Coverdell account for education expenses. Do I show these two funds on his return or his mom’s return?
— Grandpa

A. The answer will include a few “it depends.”

First let’s address the 529 savings account.

A 529 savings account is a type of account that allows for tax-free growth and potentially tax-free distributions if the funds are withdrawn for qualified educational expenses, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

During tax time, an IRS Form 1099-Q will be issued by the 529 custodian for any withdrawals taken during the tax year, Maye said.

So the first thing to check is who was the recipient of the 1099-Q.

“The recipient of the Form 1099-Q will be either the account owner or the beneficiary, depending upon who received the proceeds of the withdrawal,” he said.

Withdrawals sent to the account owner will be reported under the account owner’s Social Security number (or taxpayer identification number). Withdrawals sent to the beneficiary or to an eligible educational institution will be reported under the beneficiary’s Social Security number (or taxpayer identification number), per IRS guidelines, he said.

The next question is whether the 1099-Q needs to be reported at all.

“Whether the 1099-Q withdrawals need to be reported depends upon whether they were for qualifying education expenses,” he said. “If the withdrawals were used for qualifying expenses, then the recipient does not need to report the 1099-Q on their tax return as the proceeds are not taxable.”

As a practical matter, Maye said, if the recipient is the account owner – even if the withdrawals were for qualifying expenses and they don’t report the 1099-Q on their tax return – the IRS computers might send out a notice for a deficiency, Maye said.

So the key if the owner is the recipient and receives a 1099-Q is they have the supporting information showing the funds were in fact used for qualifying educational expenses.

“Ideally the withdrawals should go to either the beneficiary or directly to the school as this will likely remove the IRS flagging the 1099-Q not being reported,” he said.

And, he said, the answer for the Coverdell question is the same as the 529 plan answer.

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