Can I fix this? I withdraw 529 funds in December 2024 for a January 2025 tuition payment

PattyG79 2025-02-10 17:40:21 UTC #1

I withdrew 529 funds on December 30, 2024, to pay a January 2025 tuition bill. Unfortunately this appears to disqualify me from taking the American Opportunity Tax Credit, because it effectively "cancels out" the $4000 I had paid out of pocket. Can I deposit this amount to a different 529 (for the student's sibling) within 60 days to avoid having this "count" toward my 2024 withdrawals?

dcandmc 2025-02-11 15:46:44 UTC #2

When was the January 2025 tuition bill actually paid? Who was the December 30, 2024 529 distribution paid to? The 529 account owner (presumably you)? The student/beneficiary? The school?

PattyG79 2025-02-12 00:22:18 UTC #3

Thank you for your response. The trade date was 12/30/2024. The "issued date" was 1/2/2025 and was paid to me (the parent), through a transfer to our checking account. The tuition payment was made by me to the school on 1/6/2025. Even though the funds did not move into our account until 1/2/2025, the amount was included on our 1099-Q for 2024.

dcandmc 2025-02-12 04:30:09 UTC #4

It sounds like you were expecting the distribution to be reported on the 2025 1099-Q, is that correct?

The 60 day rule is for refunds from the school that were treated as paid by a 529 distribution for qualified education expenses, and the refund needs to go to a 529 account for the same beneficiary.

PattyG79 2025-02-12 16:54:24 UTC #5

Yes, exactly. I had assumed the distribution would not occur or be reported until 2025.

I had hoped I could transfer the money to the same beneficiary or a sibling as an indirect rollover within 60 days, but it sounds like that is not the case. I have read conflicting posts and information on that.

Doing so would allow me to take the American Opportunity Tax Credit without "double dipping." However, I may still be able to qualify for a partial credit by assigning the 529 money to room and board and assigning $2000 in out-of-pocket contributions to tuition.

dcandmc 2025-02-12 17:42:51 UTC #6

I think one of the lessons here is if you want a 529 distribution to be credited to a certain year, don't request it on the second-to-last day of the previous year. And because of the uncertainty, if at all possible just don't request a distribution in the last week or so of a calendar year.

Yes, you should look at assigning different sources of funds to different expenses to see of you can free up some QEE for the purpose of claiming at least part of the AOTC without double dipping. If you haven't already done so, review language in the 529 chapter of IRS Pub 970 regarding "Coordination With American Opportunity and Lifetime Learning Credits."

https://www.irs.gov/pub/irs-pdf/p970.pdf (page 52)