2020 may be over, but it keeps giving us tax issues to talk about.  This blog is focused on college refunds and withdrawals from your 529 Plan.

The benefit of a 529 Plan is that you can make contributions that grow with your child and then be distributed tax-free to pay for qualified education expenses.  Some states, like New York, offer a tax deduction for resident taxpayers on their tax returns for their contributions.  (New York’s deduction is limited to a $10,000 deduction for married couples filing jointly).

When Covid-19 began spreading in colleges in spring 2020, many colleges sent students home.  That left parents asking for refunds of tuition and unused room and board.  Those who received refunds may have considered themselves lucky.  However, if you used a distribution from a 529 Plan to pay for tuition, room and board, you may wonder if this impacts your tax-free distribution.

There are a few ways to treat a refund of college expenses that was paid with 529 Plan distributions.

The first option is to recontribute the refunded amount back to your 529 Plan.  This must be done within 60 days of receiving the refund and must be for the exact amount of the refund.

The second option is to use the refund amount towards the next semester’s expenses, assuming that you can pay those expenses in the same calendar year as the refund.  For example, a refund of the spring semester could be applied to fall semester expenses. Keep in mind that doing this will reduce the amount that you will distribute from your 529 Plan for the fall semester.

Honorine M. Campisi, CPA