Grandchild is attending college with tuition of $12k/yr.
Grandchild will be living in off-campus apartment with monthly rent of $1500. (there is 1 “dorm”, but Grandchild wants to room with friend who is attending different college nearby, thus needs to live off-campus. There is no Board program.)
Parent wants to get the AOTC, so wants to pay $4k/yr of tuition/books.
School has “school year (9 months) room & board cost” of $14,220.
Grandparent is not the best at “records”, “websites”, and “deadlines”.
What is the best way to navigate this tangle to maximize
A. Tuition and rent paid on time
B. Parent pays $4k of tuition/books annually (to receive AOTC).
C. 529 funds used up as aggressively as possible (no financial aid in the mix to mess with, want to minimize the pain of record keeping and IRS) on remaining tuition/books/room/board.
My first thought was “just transfer Owner from Grandparent to Parent”, but that may have other tax implications as yet unknown?
Can 529 funds be used for “part of monthly rent” – i.e. for the 9 months of school, $1000 from 529 and $500 from Parent get co-mingled in Grandchild checking account, and one check gets written by Grandchild to Apartment Management? Or is that “not well enough documented”, and there will need to be a canceled check that exactly matches a 529 disbursement?
Unless the Grandchild is attending classes during summer quarter, there will be 3 months/year that the entirety is being paid by Parent, so we already know that one.
Am I missing either an “additional tax break to steer toward” or an “additional QE for either 529 or tax break”?
I’m also happy to go read articles and other posts, I just haven’t turned up any that aptly describe my scenario.
Grandparent-owed 529 money disbursements are counted as student income for that tax year for the purposes of computing financial aid in subsequent years. Increasing student income may reduce financial aid awards. Consider waiting to use grandparent 529 money until after the last financial aid ‘look-back’ period is past.
Colleges use prior-prior year tax info for financial aid. This means that for a student graduating college in the 2023-2024 school year, the last time you’d be filing financial aid forms would be in the spring of 2022 using your 2021 tax returns. You could start using grandparent money to pay in 2022 without financial aid impact.
If you need to use that money immediately, transferring that 529 to parent might be the better option. I have no idea if there are tax implications. Consider seeing a professional about that.
Since the college he’ll be attending is an in-state public, and we have the income we have, there is no financial aid component to our calculations. Which at least leaves the “timing level” aspect out.
Soon, distributions from a 529 will no longer be requested on the FAFSA form. In the past, all 529 distributions were reported as other income/gifts for the student - but in the late 2000’s, the requirement to report distributions from parent/student owned 529 accounts was dropped; the value of these accounts is still reported. In 2021, it was announced that distributions from any 529 would no longer be reported on the student’s FAFSA. That’s been delayed due to Federal Student Aid not updating the form in the proper timeframe. I expect that it will probably take effect 2023-24, but that is just a guess. I recognize this as a bonus for students if the grandparent contributes to their own 529 rather than giving to one owned by the parent or student. However, I know that my own grandchild is not going to be eligible for need based aid, so I just contribute to my D’s 529 to keep things simple.
I’d browse through pub 970 for complete explanation of various education tax benefits:
I think you’re on the right track with aiming for 4k of qualified expenses for the AOTC. But in practice I’m not sure it matters much if you pay the tuition or the grandparents pay it. The student will get the 1098T from the school to document tuition paid and to support the numbers you use to claim the AOTC. IIRC, tuition paid on behalf of student by grandparents will be treated as if paid by you for AOTC purposes.
Of course, given that the grandparent money is coming from a 529 you’ll want to be mindful of coordinating (not overlapping) these benefits. Pub 970 explains this and how to handle taxation in the QTP section. Contrary to popular belief, it IS possible to claim the AOTC when expenses are paid from 529; it just creates some taxable income (which, depending on a student’s other sources of income, may or may not result in additional tax paid). Or if you want to keep it simple: yes, just have parents pay first 4k of tuition. [ETA: worth noting that the taxable income would be the earnings portion of 529 only, not the entire amount].
Keep in mind your expenses will stretch over 5 tax years but you can only take the AOTC for 4 of those.
I think I’d rather keep the $4k for AOTC separate from the 529 paid-for money, just for clarity sake.
Mostly I’m gathering options for a conversation with extremely generous Grandparent on the occasion of Grandchild’s HS graduation in 2 weeks, so that we can pick the best path forward. It’ll be about the only time all 3 of us are in the same physical location before college starts, in case there’s some paper form we all need to sign & get notarized to go with whichever path we choose.
I’d pay the $4k in tuition for the AOTC, and use the 529 for other expenses. The QEEs are not the same for the AOTC and use of the 529 and it is just easier to prove (if you ever have to) that you paid the tuition. Use the 529 for room and board, computers, etc. The school won’t separate it out on the 1098, but you can show a check for tuition for $4000k each year and the rest paid from the 529.
Paying the first 4k directly is a fine plan, and simple, for this case.
I do want to clarify a few things for others who might be in a similar situation but with different numbers or constraints.
Per pub 970, for the purposes of AOTC: “Qualified education expenses paid by a dependent you claim on your tax return, or by a third party for that dependent, are considered paid by you.”
So, a direct payment of tuition by a parent is not necessary to claim the AOTC. The 1098t showing tuition was paid is sufficient.
As for the 529, it is possible to pay all tuition from a 529 and still claim the AOTC. This is described by the IRS in pub 970 in the QTP section. The coordination of benefits in that case happens when filing the taxes. If 4k of tuition payment (made from a 529) is used to claim the AOTC, it simply means that the earnings portion of 4k of the 529 distribution becomes taxable income. There are cases in which this could generate little to no additional tax. There is no 10% penalty for an excess distribution created by claiming the AOTC, as the IRS makes clear in pub 970.
Just wanted to point those two things out as I think many aren’t aware.
I meant the school wouldn’t separate out where the money came from on the 1098t - from a 529, from a parent, from the student. On my daughter’s, a scholarship paid her meal plan, and that money was just included as a scholarship received on the 1098 with no corresponding charge in the ‘cost box’. On her billing statement, it was applied to the meal plan so was easy to see what funds paid for what.