Son staying home - withdrawing from 529

[Curious6789]

My son will be staying home for his junior year and commuting each day (college is about 20 miles from home). His scholarship covers his tuition and will leave some money for books etc. We plan to withdraw the scholarship amount from 529. My question is about room & board. Can we withdraw the amount specified for R&B in the college's cost of attendance from 529 without any taxes or penalty? Do we need to show proof/save any receipts etc? Thank you for your help!!

[Curious6789]

Adding more info - looking at the college's cost of attendance, they have a much lower R&B amount for a student "living with parent"! Is that the maximum I can withdraw from 529 without taxes or penalty? It's a bummer not to be able to withdraw the higher amount!

COA also has a travel amount. Since my son will be commuting from home, he will have travel expenses. Can we withdraw the travel amount included in the COA from 529 without taxes or penalty?

Thanks again!

[dcandmc]

Adding more info - looking at the college's cost of attendance, they have a much lower R&B amount for a student "living with parent"! Is that the maximum I can withdraw from 529 without taxes or penalty?

Withdrawn for room and board, yes.

COA also has a travel amount. Since my son will be commuting from home, he will have travel expenses. Can we withdraw the travel amount included in the COA from 529 without taxes or penalty?

No.

[Curious6789]

Thank you, dcandmc!! The college web site estimates $13,510 as the R&B if the student is living on campus, $9,684 if the student is living off campus and only $2,972 if living with parent!! COA also estimates $2,358 for travel due to living with parent, but if I can't withdraw that from 529 (without tax/penalty), is $2,972 the maximum I can withdraw without taxes or penalty (other than the withdrawal for tuition/fees/books)?

[dcandmc]

The college web site estimates $13,510 as the R&B if the student is living on campus, $9,684 if the student is living off campus and only $2,972 if living with parent!! COA also estimates $2,358 for travel due to living with parent, but if I can't withdraw that from 529 (without tax/penalty), is $2,972 the maximum I can withdraw without taxes or penalty (other than the withdrawal for tuition/fees/books)?

You can take 529 distributions for qualified expenses without incurring taxes and penalties. Transportation is not a 529 qualified expense. Room and board is a 529 qualified expense for students who are enrolled at least half-time. Your son's school provides room and board COAs for different living arrangements, so use the room and board COA provided by the school that is most appropriate for your son's situation. Besides tuition, certain fees, books, required supplies and equipment, and room and board, "the purchase of computer or peripheral equipment, computer software, or Internet access and related services" can also be 529 qualified expenses.

See Chapter 8 of IRS Pub 970:

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

Note that the 529 distribution taken based on the tax-free scholarship funds that your son receives will need to be reported as income on the tax return of the person to whom the distribution is made payable.

[Curious6789]

Thank you again, dcandmc!!

As far as withdrawing the amount equal to the scholarship, I've been separating that amount into two buckets. The first is the tax-free scholarship part that I can attribute to qualified expenses like tuition and books. The second remaining amount, I've been reporting as taxable income to my son and also paying 10% penalty on the earnings portion of that second amount. Do you think I've been handling it correctly?

[dcandmc]

As far as withdrawing the amount equal to the scholarship, I've been separating that amount into two buckets. The first is the tax-free scholarship part that I can attribute to qualified expenses like tuition and books. The second remaining amount, I've been reporting as taxable income to my son and also paying 10% penalty on the earnings portion of that second amount. Do you think I've been handling it correctly?

All of the earnings portion a 529 distribution taken because of a scholarship received by your son is reported as taxable income, no matter what the scholarship funds were used for; the 10% penalty is waived only to the extent that the scholarship was used for 529 qualified expenses.

[Curious6789]

Thank you! Do you also include "room and board" in the "529 qualified expenses" term? My understanding was that the 10% penalty will apply if it's not used for things like tuition, books etc that are qualified for tax-free scholarship.

[dcandmc]

Reading Chapter 8 of the IRS pub that I provided a link for earlier will be helpful to you -- lots of good information there. Chapter 1 of the pub deals with scholarships, so that should be of interest as well. In fact, other chapters might also be beneficial (especially those dealing with education tax credits).