Discussion:529 Distribution to Non-Beneficiary

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Discussion Forum Index --> Tax Questions --> 529 Distribution to Non-Beneficiary

Msmith7305 (talk|edits) said:

3 March 2006
Father maintains 2 529 plans for his 2 college student sons. Dad pays all the education costs and then takes distribution from each son's plan to reimburse himself for costs. 1099s go to Dad and are marked as being to non-beneficiary. Dad's income is too high to receive any education benefits. Dad's income is too high to get any personal exemptions. His sons have to file tax returns which will show a tax liability. Are there any issues that would keep Dad from not claiming sons on his return and passing on education benefits to his children? The kids of course would file as being a dependent (but not actually claimed) and would therefore not take the personal exemption. I guess what throws me with all this is that the 1099s from the 529 plans have Dad's social security number on them. Qualified education costs far exceed the amounts needed to claim education credits/deductions and (with room and board) still exceed the 529 distribution.


Riley2 (talk|edits) said:

5 March 2006
Dad will need to recognize income if the qualified educational expenses of the designated beneficiary are lower than the 529 distributions from that particular account. I see no problem with the sons claiming the educational credits for the amounts of qualified expenses that are not used as 529 qualified expenses.

Msmith7305 (talk|edits) said:

5 March 2006
Thanks Riley2! QEE are far higher than 529 distribution.

Jancpa (talk|edits) said:

Riley2, do you perchance have a reference for this conclusion? Everything I can find indicates that Dad will pay income tax, as well as the 10% penalty, on all of the earnings, because he is not the designated beneficiary nor were the payments made directly to the institution(s). I'd love to find something official that says otherwise!

CAI (talk|edits) said:

3 April 2008
Jancpa - Did you find any info on your question?

RoyDaleOne (talk|edits) said:

4 April 2008

Taxwizard (talk|edits) said:

4 April 2008
Jan, I will answer for Riley2. The distributee (not always the same as the designated beneficiary) will not include the distribution in income as long as the designated beneficiary's qualified higher educational expenses are more than the distribution. See Sec. 529(c)(3)(B)(ii).

Also, remember that the qualified higher educational expenses for purposes of Sec. 529 must be reduced by any expenses used to qualify for the Hope Credit or the Lifetime Learning Credit.

Consumer question/related answer have been moved here.

Birdman (talk|edits) said:

6 May 2009
I'll add on to this one...

A client, who was the distributee, just got a notice of tax due on the distribution. The client's child is the beneficiary, but the 1099 was to the client, like the original question. Since the child's educational expenses exceeded the distribution, I did not report anything on the client's return, and I don't see that I should have. If it was taxable, I would have reported it on line 21. Are there any worksheets or forms that I should have attached? Now my solution to the notice is to write a letter stating that the expenses exceeded the distribution, so none is taxable. Will the client get this notice every year? Any ideas?

Joanmcq (talk|edits) said:

7 May 2009
The solution is to have the distribution made to the beneficiary or the school. As they are supposed to do per the regs that set up the 529. One of the touted benefits was that even if the distribution exceeded the qualified expenses, the income would be taxed at the beneficiarie's rate, not the parent's.

Blrgcpa (talk|edits) said:

7 May 2009
The payment should go to the school. Second choice is the bene.

The 529 has penalties to go anywhere else.

Birdman (talk|edits) said:

7 May 2009
Thanks. Any thoughts on my question about resolving the notice?

Illini (talk|edits) said:

7 May 2009
QTP Distribution worksheet is attached to the 1040 to show how much QTP distribution is taxable. It must be included even if QEE exceeds the distribution amount, otherwise, how will the IRS know how much is taxable or not?

I'm still uncomfortable interpreting 529(c)(3)(B)(ii) as allowing the owner distributee to claim their child's QEE against the distribution on the worksheet.

The 529 ALLOWS distributions to the owner, but it will only be a qualified distribution if the OWNER uses it for their own QEE, not for the dependent's.

I agree with other posters who say the distribution should either be made directly to the college or to the beneficiary for whose education the money was intended for.

If I am correct, then it is absolutely wrong to claim the QEE of the beneficiary on the QTP Distribution Worksheet when the distributee was the owner (non-student).

The law was written to allow the flexibility to allow the owner to take courses and use the 529 money, particularly if the child beneficiary decided not to go to college and no other new beneficiaries can be assigned.

For what it's worth, I haven't seen very many large gains on 529 contracts lately. Most of them are "under water" and there is no taxable income to report any way.

Illini (talk|edits) said:

11 May 2009
I stand corrected - this is from the the '529 Guru' offers his answers on questions you have asked about 529 Plans. (Joe Hurley is the "guru" on 529 plans.)

Decide where to distribute 529 funds.

edited 5/12/09 to remove material likely under copyright by Bankrate (savingforcollege.com is a Bankrate, Inc. company), replaced content with a direct link to the content, which was a nice recap of the choices you have with regard to who receives the distribution.

Illini (talk|edits) said:

11 May 2009
Joe Hurley's excellent site is at:


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