States maintain 529 plans to help save for college. Contributions to such plans aren’t deductible, but the money grows tax-free while it remains in the plan, and if you use the money for qualified educational expenses, the earnings remain tax-free. When it comes time to take distributions, knowing how to report the distributions helps ensure you file your taxes correctly.
529 Plan Tax Forms
If you took a distribution from your 529 plan during the year, you’ll receive a Form 1099-Q at the end of the year from the financial institution that manages your plan. This form shows not only how much you took out, but also the portion of the distribution that comes from earnings on your contributions. Distributions from 529 plans are prorated between contributions and earnings, which means that the percentage of contributions in your plan determines the percentage of your distribution that comes from contributions. For example, if your 529 plan has $8500 worth of contributions and $1500 worth of earnings in it, 85 percent of any distributions you take are considered as contributions, and 15 percent as earnings.
When you take a qualified distribution from your 529 plan, you don’t have to report your distribution on your taxes at all. You don’t even have to put a anywhere or fill out a form to show your qualified expenses. In order for your distribution to be fully qualified, you must use all of the distribution for qualified expenses. These include tuition, fees, books, supplies and, for students enrolled at least half-time, room and board.
Taxes on Non-Qualified Distributions
If you don’t use all of the distribution for qualified expenses, you have to include the portion of earnings not used for qualifying expenses as taxable income. For example, if your 529 plan has 85 percent contributions and 15 percent earnings and you take a non-qualified distribution of $1,000, $150 of that distribution is considered earnings and therefore is taxable income. If you use half of that distribution for qualified expenses, half the earnings, or $75, is taxable. Report the taxable income on line 21 of Form 1040.
Non-Qualified Withdrawal Penalty
When you take a non-qualified withdrawal, you also have to pay a 10 percent early withdrawal penalty on the taxable portion of the distribution, unless an exception applies. Exceptions include if the student attends a U.S. military academy, becomes permanently disabled, or receives a scholarship for costs that would have qualified. Whether you’re claiming an exception to the penalty or calculating the penalty, you must use Part II of Form 5329. Any resulting penalty goes on line 58 of Form 1040.
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