By Kimberly Lankford
I hear there are new rules about using 529 money tax-free for computers. What are the rules, and what other expenses are fair game for using 529 money tax-free? What records do I need to keep?
Congress recently passed legislation that permits the tax-free use of 529 money for computers – both retroactively for 2015 and permanently for future years (see 12 Valuable Tax Breaks Congress Brought Back to Life). A computer had been an eligible expense for tax-free withdrawals from a 529 in 2009 and 2010, but for the past few years it was eligible for tax-free withdrawals only if the computer was required by the college for attendance. Now you can take tax-free withdrawals for a computer, printer, scanner and other peripheral equipment, education-related software (not games) and the cost of Internet access – whether or not it is required by the school. The college student must be the primary user of the computer and equipment.
You can also use 529 money tax-free for college tuition, room and board, fees and required books. “Most of the expenses related to taking classes count, but you can’t use it for transportation,” says Mary Morris, chairman of the College Savings Foundation and CEO of the Virginia 529 College Savings Plan.
You can even use 529 money tax-free for room and board if you live off-campus, as long as you’re attending college at least half-time. Your actual expenses count, up to the amount the college specifies as the room and board figure in its cost of attendance for federal financial aid purposes (the cost is usually listed on the college’s Web site, or ask the financial aid office).
You don’t need to provide special documentation to your college savings plan administrator to withdraw money, but you do need to keep records of your expenses or the date and price of the purchases in your tax files. “If you’re audited, you need to be able to establish that the 529 withdrawal was for qualified higher education expenses and that you have the records to match up with that,” says Morris.
In years you make 529 withdrawals, you’ll get a 1099-Q tax form from the plan administrator, usually by January 31 of the following year (although some may be delayed by a few weeks this year because of a technical change in how administrators report withdrawals, which was also included in the law signed in December). If the withdrawals were for eligible expenses, you don’t need to do anything when you file your taxes – just keep the 1099-Q form and your receipts in your tax records. But if you use 529 money for any ineligible expenses, you’ll have to pay taxes and a 10% penalty on the earnings withdrawn. The 1099-Q will specify which portion of the withdrawal is considered principal and which is earnings.