Meals expensed from 529

[lsag02]

My daughter meal plan includes 14 meals a week. It means other 7 meals she will be buying elsewhere paying out of the pocket. Can we expense these 7 meals a week from her 529? and how can we do this?

[prinehart]

Every school should have a reported COA - Cost of Attendance. I have always used this value as a guide for what is allowed to be withdrawn. For example, my son is living off campus for his final year. His University set COA for living off campus and not at home gives me a value of $6198 per semester for room and board. I can withdraw up to that amount for it to be considered a qualified expense. When my daughter was living in the dorm the last two years, her COA value, set by the university, was tuition + room and board. I wasn't able to withdraw extra money for the meals she paid out of pocket. Check to see if your university includes "dining dollars" with the meal plan. Both of my kids schools had "cash/dining dollars" tied to the meal plan, that they could use at certain locations and convenience stores to purchase snacks and extra meals.

[lsag02]

I do not understand. I can withdraw from 529 up to the college COA?

The college offers different meal plans from 7 meals per week up to 21 meals per week. The cost is obviously different for each meal plan. We chose 14 meals per week with the assumption she will be eating in the dining hall twice a day and one time she will eat elsewhere. So can I withdraw money from her 529 to cover this extra meal a day and how the value is calculated?

Tuition is free for my daughter, we only pay room and board and college fees.

[prinehart]

It is my understanding, from my tax advisor, that you can withdraw the full amount for room and board listed on the COA for your university. I requested an official COA document from the schools, as it was difficult for me to find it on their websites. The amount usually varies by year started. I printed a copy to save for my records. The COA should break it down for tuition/fees, room/board, books, miscellaneous. It should also break it down for in-state/out of state on campus, off campus, and living with parent I have only used this for withdrawing for my son, when he lived in off campus housing, and for living at home online/commuting through covid. The warning here is you cannot withdraw more than the posted COA for room/board expenses. I have never used the COA for books/supplies; I relied on receipts of actual expenses for books. Like I mentioned before, the COA did not work for my daughter living on campus, as the COA was set at the meal plan/housing choice that she chose. She only had 10 meals a week, with both dining dollars and extra "campus" cash. Even with only 10 weekly meals, she usually had left over meals at the end of the week that went unused and she lost credit for if she didn't cash them in at a convenience store. Most college students only really eat 2 times a day. My daughter would have cereal and milk, granola bars and yogurt in her room to eat for breakfast. Her plan allowed her to turn in her unused meals at the end of the week at a convenience store for groceries, so she was always well stocked.

[prinehart]

But, you have to divide it by 2 - can only withdraw in the year it was used. Don't pull out the full COA for the fall. Withdraw half now and then half again in January.

[lsag02]

But I assume you need to provide proof how you spent withdrawn funds? So if say COA is $20K I can withdraw up to $10K a semester, and say my daughter spent only $8k on approved expenses then I have a problem with $2k?

So specifically to meals outside her meal plan, what type of proof do I need to show and what kind of meals are covered?

[mark]

You can take out any amount you want from a 529. It belongs to you. The only question is whether it is a qualified expense (you pay no taxes) or an unqualified expense (you pay penalty+taxes). If the COA from a school says $5,000 for food and you buy a meal plan for $3,000 and have another $2,000 in outside meal expenses then I think can withdraw $5,000 from your 529 as used for qualified expenses. As to what proof you need for that $2,000, it would be rare that the IRS would ask you to provide proof. However, in the rare case they do, the more receipts you have the better. I never required my children to save food receipts. I did save a copy of the COA. Assuming all 529 withdrawals are qualified, you don't have to enter anything on your taxes (programs like Turbotax will ask about them, but nothing will flow to the final return).

[lsag02]

What about scholarship? Does it reduce amount I can withdraw from 529? My daughter's scholarship covers all college fees and about half of room and board, tuition is free as my wife works for the college.

So say COA room and board is $7K / semester, term bill to cover room and 14 meals a week plan is $6K, scholarship covers $5K, how much we can withdraw from 529? We need to cover remaining $1K of room and board not covered by her scholarship and extra finds to cover 1 meal a day not covered by her meal plan.

[mark]

You could take out $2K (7K-5K) as a normal qualified withdrawal assuming you spent at least $1K extra for the 1 meal a day. Although I have not done this, I believe if you took out another $5K, it would be unqualified but you don't have to pay the penalty (just tax on the gains) because of the scholarship. I have never done that, but I think that is how it works.

[dcandmc]

But, you have to divide it by 2 - can only withdraw in the year it was used. Don't pull out the full COA for the fall. Withdraw half now and then half again in January.

You don't need to match up 529 distributions in the same year that the money was used -- you need to match up the distributions in the same year that the corresponding expense was paid. For example, if you paid for spring semester expenses (tuition, room and board paid to the school) in December 2020, the 529 dollars to pay that bill should have been withdrawn from the 529 account in 2020. You paid the bill in 2020 with 529 dollars withdrawn in 2020, but the benefit (tuition, room and board) wasn't "used" until 2021.

[dcandmc]

But I assume you need to provide proof how you spent withdrawn funds? So if say COA is $20K I can withdraw up to $10K a semester, and say my daughter spent only $8k on approved expenses then I have a problem with $2k?

So specifically to meals outside her meal plan, what type of proof do I need to show and what kind of meals are covered?

It would be very rare for the IRS to ask for receipts or "proof" of expenses you claim as qualified that were paid with 529 dollars. If the COA for tuition, room and board is $20k, then you can use up to $20k in 529 dollars to cover those expenses. If the room and board is furnished by the school than it will likely be billed in whole directly by the school; there will be nothing left over to worry about. If the student lives off campus without a school meal plan, 529 money for housing and meals can be withdrawn up to the school's COA that's most applicable to the student's living situation, without tax consequences and possibly a 10% penalty. Some schools will only provide one COA regardless of the student's living situation; some schools provide different COAs depending on the student's living situation (in a dorm with a meal plan; off campus without a meal plan; at home with parents or relatives; etc.).

[dcandmc]

What about scholarship? Does it reduce amount I can withdraw from 529? My daughter's scholarship covers all college fees and about half of room and board, tuition is free as my wife works for the college.

So say COA room and board is $7K / semester, term bill to cover room and 14 meals a week plan is $6K, scholarship covers $5K, how much we can withdraw from 529? We need to cover remaining $1K of room and board not covered by her scholarship and extra finds to cover 1 meal a day not covered by her meal plan.

Remember that a scholarship used for room and board is taxable income to the student. Qualified 529 expenses must be reduced by the amount of any tax-free scholarships received, which in your daughter's case sounds like all of her tuition. Since most of your daughter's room and board is covered by a taxable scholarship, the amount spent on room and board will not see a reduction in the qualified expense amount. You should review IRS Pub 970, Tax Benefits for Education, if you have not already done so. Pay particular attention to Chapter 1 (Scholarships, Fellowship Grants,
Grants, and Tuition Reductions) and Chapter 8 (Qualified Tuition Program (QTP)).

https://www.irs.gov/pub/irs-pdf/p970.pdf

You keep asking how much you can withdraw from a 529. The actual answer is that you can withdraw as much as you want, up to the full balance. The real question to ask is how much you can withdraw from a 529 without incurring tax on the earnings portion of any distribution along with any potential 10% penalty. Again, read Pub 970 (Chapter 8) to gain a better understanding of how this all works.

[lsag02]

When I ask abut 529 withdrawal I imply withdrawal to pay for qualified expenses without taxes or penalties. I fully understand I can technically withdraw any amount from my daughter's 529 plan.

I do not understand the comment about scholarship and room and board. As I said the tuition is free due to my wife's employment with the university. Her scholarship fully covers the fees and partially covers the room and board.

"scholarship used for room and board is taxable income to the student" does it mean my daughter needs to report portion of her scholarship that pays for part of room and board as her income? and it mean the portion of the scholarship what pays specifically for room and board does not reduce amount of qualified expenses paid from 529?

If COA part of room and board is $7K, scholarship covers $6K based on two meals a day plan, I can still withdraw $7K from her 529 penalty and tax free?

[dcandmc]

"scholarship used for room and board is taxable income to the student" does it mean my daughter needs to report portion of her scholarship that pays for part of room and board as her income?

Yes.

Have you looked at IRS Pub 970? Instead of asking anonymous internet forum people for important advice, why not go directly to an informative and relevant publication from an authoritative source?

[lsag02]

Can you please point me to the place in this IRS publication that states that scholarship used for room and board is taxed?

[dcandmc]

Can you please point me to the place in this IRS publication that states that scholarship used for room and board is taxed?

A scholarship or fellowship grant is tax free only to the extent:
•It doesn't exceed your qualified education expenses;
•It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and
•It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for services, later.

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
•Tuition and fees required to enroll at or attend an eligible educational institution; and
•Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don't qualify. Qualified education expenses don't include the cost of:
•Room and board,
•Travel,
•Research,
•Clerical help, or
•Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.

Taxable Scholarships and Fellowship Grants
If and to the extent your scholarship or fellowship grant doesn't meet the requirements described earlier, it is taxable and must be included in gross income. You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship grant.

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These paragraphs are from pages 5 and 6 of IRS Pub 970.

https://www.irs.gov/pub/irs-pdf/p970.pdf

[lsag02]

Thank you. This is helpful. How does my daughter report this part of her scholarship on income tax? University never sent her any document regarding her scholarship, it just appears in her term bill as credits and it is automatically applied to her term bill. I assume she need to calculate what portion of her scholarship is used to pay for room and board for tax purposes since the portion used to pay for fees is tax free?

I personally never heard of anyone paying taxes on scholarship. I wonder what happens to needy poor students who get "free ride" to college basically scholarship that pays for everything from tuition to fees to books and room and board. It means that they should get hefty income tax for room and board portion then?

[dcandmc]

Thank you. This is helpful. How does my daughter report this part of her scholarship on income tax? University never sent her any document regarding her scholarship, it just appears in her term bill as credits and it is automatically applied to her term bill. I assume she need to calculate what portion of her scholarship is used to pay for room and board for tax purposes since the portion used to pay for fees is tax free?

I personally never heard of anyone paying taxes on scholarship. I wonder what happens to needy poor students who get "free ride" to college basically scholarship that pays for everything from tuition to fees to books and room and board. It means that they should get hefty income tax for room and board portion then?

So many questions. Because of the complexity of the issue and the need to get it right, you really need to do your own research and/or engage the services of a tax preparer with whom you are comfortable. I suggest that you start with IRS Pub 17. Note that taxable scholarships and fellowship grants are considered earned income when calculating the standard deduction. This is a good thing. See Table 10-3, Standard Deduction Worksheet for Dependents, on page 93 of the 2020 version of Pub 17 (I am assuming that you will claim your daughter as a tax dependent on your 2021 tax return, and make sure to use the 2021 version of the pub when it becomes available). If the kiddie tax (IRS Form 8615) comes into play, taxable scholarships are considered unearned income when figuring the tax owed. This is a bad thing. But, flipping back to the good side, the standard deduction for single dependents in 2021 is $12,550. This is why the actual income tax owed by "needy poor students" because of the receipt of taxable scholarships is often either a relatively small amount, or $0. But the reporting requirement is still there.

https://www.irs.gov/pub/irs-pdf/p17.pdf

[lsag02]

Thank you once more. I so far claimed her on my an my wife's joint tax return but next year I may not due to the fact she is working the whole year and is expected to earn ~$8K in 2021 so she may file her own tax return next year. Her scholarship is $13K.

[dcandmc]

Thank you once more. I so far claimed her on my an my wife's joint tax return but next year I may not due to the fact she is working the whole year and is expected to earn ~$8K in 2021 so she may file her own tax return next year. Her scholarship is $13K.

What is the perceived benefit if you don't claim your daughter as a tax dependent on your 2021 tax return? Will your daughter not meet the rules this year for claiming her as your tax dependent? See the section on Dependents in Pub 17, starting on page 25 in the previously linked PDF version.