Q. I received a notice from the IRS saying that I owe taxes on distributions from a 529 Plan. I know that the distribution was used for qualified education expenses of my child. What do I do?
A. In the past few years, we have started seeing people take distributions from the 529 Plan education savings accounts that they set up previously. Distributions from these plans must be used for qualified higher education expenses (QEE) to avoid the tax and penalty on the earnings. If the QEE exceeded the distribution we didn’t have to report the distribution or the education expenses unless the IRS asked for the information.
I have had clients recently receive these notices. We are responding to the IRS by reporting the QEE and showing that they exceed the distribution, thereby making it a qualified distribution not subject to tax. If the distribution exceeds the QEE, you must calculate the amount that should be taxable and if any of it is subject to the 10% penalty for not using it for QEE. There are exceptions to the 10% penalty so be aware of them.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of 1. avoiding penalties under the Internal Revenue Code or 2. promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Securities offered through Valley National Investments, Inc. - an independent broker/dealer and member FINRA and SIPC.
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