WELCOME BACK, JOE!! I've MISSED YOU!!
Time for my latest puzzler............
It's possibly a bit late now, as I'm doing 2010 taxes, but at least I hope to get things straight going forward, with your help.......
We have a "UTMA" 529 Plan for our older son. The amount in the plan will not cover all 4 years of college, so at least we don't have to worry about left-over amounts or, if done right, any "taxable" portions of distributions.
But I may have made a slight timing error this year that will make me have to be a bit more careful going forward......
Rather than coordinate a direct payment in advance from the 529 Plan to the University, I paid up-front for his 2010 Fall semester mid-year. When the dust had settled for the fall semester charges & book purchases, I requested a reimbursement from the 529 plan for the full amount LESS $4k.
Since we knew the 529 plan would not fully cover our son's 4 years of college & that we'd be shelling out the difference at some point, we figured reimbursing all but the $4k allowed us to claim the American Opportunity Credit of $2500 on that $4k on our 2010 taxes. So, technically, the net cost to us for $4k worth of tuition, etc would only be $1500. We plan on doing similar each year.
The problem is in how we ended up handling his Spring '11 tuition. The invoice did not get posted by the University until mid-December, and was due the day after New Year's. Once again, we paid the amount up-front in 2010 with both our money and our son’s college money in his name. Our plan was to reimburse both ourselves and our son IN FULL this time (since we'd already paid the $4k in the fall to qualify for the AOC), but to wait to do so until 2011 for several reasons:
(1) It was already late in Dec '10, and we were going on vacation & didn't want any large financial transactions going on when we could not address them,
(2) With the money due so quickly and around the XMas & New Years holidays, we were concerned that the 529 plan might not get all the paperwork in order & make payment in time to the school, so it was easier for us to do it ourselves up-front & handle reimbursement later, and
(3) We figured we'd have the amount waiting to reimburse us (and especially our son) stay in the 529 until we completed the FAFSA for next fall, so it would be calculated at the lower rate than if we had repaid a portion of it into our son's savings.
I now realize we should have just requested the distribution to at least us in a timely fashion into our checking account to reimburse us (since we paid it initially up-front), since the EFC rate on this money would have been the same either way..... (DOH!!).
So my first question is this: Is there a hard and fast rule anywhere that expenses incurred/paid out by us in any given tax year must be repaid via a distribution request from a 529 plan in that same year? If we paid very late in 2010 for Spring 2011 expenses, do we have to request a reimbursement distribution in 2010, or can we still request it in 2011 as we originally planned?
Question #2: If we DO have to take a distribution in the same year, what is the determining factor? Is it the date we REQUEST the distribution, the date the request's receipt is acknowledged, or the actual date the distribution is made & hits our bank account?
Assuming for a moment that we should have requested the reimbursement for the Spring 2011 semester in 2010, and now it's too late, it brings up a few interesting tax questions for 2010 & 2011........
(1) The University puts out the Spring 2011 bill mid-Dec 2010 . It also lists ANTICIPATED scholarship amounts that are not actually POSTED until
Feb 2011. So total costs is approx $17k, but we only have to pay up-front the balance AFTER the anticipated $4k in scholarships. So we have technically paid up-front in 2010 approx $13k that we cannot reimburse. (Later, in Feb 2011, the University applied the scholarships & our final balance due became $0.) So do we have to handle the payments as made in 2010 & now not reimburseable, but the scholarship reductions as part of our 2011 tax calculations?
(2) As his supporting parents who actually paid $4k out of our own money for the 2010 Fall semester, we are claiming the AOC on our 2010 taxes. Tax instructions indicate our son cannot claim that.
HOWEVER.... because we may have left the Spring 2011's approx $13k bill on the table as paid by us vs reimburseable at this point in 2011 by the 529 plan, and because a portion of that $13k comes from college money saved in our son's accounts vs our own, can HE claim his amounts paid against his taxes via the "Tuition-and-Fees" adjustment to gross income via form 8917 on 1040 line 34?
Form 8917 states at the top that "you cannot take both an education credit from Form 8863 and a tuition&fees deduction from this form for the same student for the same year", but my interpretation is that WE would be claiming the $4k WE spent for the fall 2010 semester as the AOC on OUR taxes, while our son should be able to take the T&F deduction via Form 8917 for the portion HE ended up having to pay out of HIS college savings for the possibly un-reimburseable 2011 Spring semester expenses.
Do you agree? Am I reading things right?
Of course, if you tell me that my initial question re: when we have to reimburse ourselves ALLOWS us to reimburse in 2011 any payments we made in 2010 for 2011 expenses, then the above will be a moot point, as we will very soon request a reimbursement distribution from the 529 plan that would pay both ourselves and our son back in full for all Spring 2011 outlays so far...........
And, if that's allowable, so as not to take out more than allowed before any tax becomes an issue, we'd likely always be a "semester behind" in repaying ourselves until the money runs out in the plan.... (i.e. reimburse fall 2010 in 2010; spring & fall 2011 in 2011; spring & fall 2012 in 2012; ... etc).
So, to recap, a lot of our current tax handling & future taxes/planning hinges on the answer to 2 driving questions:
(1) When must distributions be made for any given expense paid up-front, and
(2) If money beyond the initial $4 for AOC is left on the table as paid by both us & our son, can our son also claim a Form 8917 deduction for HIS part of the money paid even when we take the AOC on our taxes for the separate $4k we spent?
I hope the above is not too confusing. Just when I think I've thought of everything, I start questioning what I've done based on what I see during tax preparation & in others' posts.......
Thank you VERY much for helping straighten-out my understanding on this one, and glad you're back!!