So, my S22 and I have a date tonight to “do paperwork” with an open phone line so we can ask questions back and forth as needed. Step 1 is to fill out the FAFSA (and fingers crossed that it’s available when we’re available, I guess). Step 2 is to make sure that taxes are filled out. My question is: Does S22 need to file taxes?
S22 had no earned income this year. (At least, to the best of my knowledge. If he did pick up a job, then yes, we’ll need to file taxes.)
S22 was a full-time student. S22 did have a small merit scholarship for the winter & spring quarters in 2023.
S22 pulled money from a 529 set up by a grandparent.
S22 used that money only to pay for tuition or rent, well under the COA of the state university he is attending.
So, I definitely need to do taxes, what with paying “the other stuff for school above what the 529 covered” + earned income + claiming the AOTC.
But, does S22 need to file taxes to say “yup, all that 529 money paid for tuition or rent”? From what I can see online, it seems like the answer to that is “No”.
And, yes, I should consult a tax professional in my state if I want to be sure. I’m just going for a first pass before I’m speaking harshly into a speakerphone at S22 in a few hours, while we try to figure it all out.
The merit scholarship would only be taxable income if it paid for room and board, or if you want to declare it taxable in order to take advantage of other tax breaks for tuition expenses that you paid (AOTC). Did you pay enough eligible “other stuff” for you to receive the full AOTC if the scholarship is applied to tuition? If not then he will probably want to file and declare it taxable (since he won’t actually incur any tax and you’ll get a bigger AOTC tax break).
There are no filings required for 529 withdrawals unless these are used for non-qualified expenses and would be taxable to the recipient (such as extra withdrawals made on account of receiving a scholarship, although with the ability to rollover unspent amounts to a Roth IRA, this is becoming less likely).
I intentionally paid precisely $4000 of the tuition costs in order to use the AOTC. So, $2k merit + $4k mom/dad + $2800 from 529 = tuition for winter & spring quarters in 2023.
The other 529 disbursements went to partial rent payments during the school year (and the rest of the rent was from mom/dad who also got to cover books & board. ).
Thank goodness that merit scholarship was only for the first year. Next year’s taxes won’t be nearly so confusing. sigh (sarcasm only slightly lessens the financial difference…)
Make sure he would not be entitled to any state tax refunds. In Colorado there are often sales tax rebates or other rebates and all you have to do to get them is file. I haven’t filed this year but I believe it is up to $800 for a property tax refund.
For my mother a few years ago I used her interest on a bank account, WAY under the $12000 personal exemption so no taxes owed, and she got a small refund.
Our state doesn’t have any state income tax to file. So, any rebates would be done some other way, but I’m pretty sure they aren’t giving any money back this year…
It sounds like your son has no federal tax filing obligations that might result from 529 distributions he received. You say to the best of your knowledge he had no earned income in 2023. What about unearned income, like interest, dividends, capital gains distributions, etc.? If he can be claimed as a dependent on your federal return, the standard deduction for unearned income is much lower than you might think.
I don’t understand how you could be doing taxes now that are related to the current FAFSA. That’s based on tax year 2022, so that should have been filed by April (or with extension, October) last year. That’s the whole idea of prior-prior year - everyone’s taxes are done long before they need them for FAFSA/CSS.
Your questions are very relevant, but surely all the tax year 2022 stuff was sorted out ages ago.
OP’s concern is about filing a tax return for 2023 as it relates to her son’s 2023 income and 2023 distributions from a 529 account, so now is the time to be asking those questions.
As BelknapPoint figured out, our plans were to do the 2024 FAFSA for the 2024-2025 school year, with our 2022 tax information. And also the 2023 taxes for the kid.
Well, I do think he has a small savings account, but the interest on that doesn’t reach the $100 level. And he hasn’t been much of an investor with his allowance. Nor have any family members been putting money in large quantities into his name (aside from the 529 from Grandma).
I’ll check and make sure he doesn’t have more squirreled away generating passive income than I’m aware of, though.
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