Scholarship Stipend and 529 Plan

BelknapPoint
Wed, 30 Aug 2017 15:47:03 +0000

First of all, if your parents make a 529 distribution payable to your son or to the school, and the payment is used for non-QEE and it is therefore taxable, it will be your son who is responsible for the tax, not your parents.

If the school automatically applies a $3,500 stipend to a room and board bill of $8,000, an additional non-taxable 529 payment of $4,500 can be used to pay the balance. Note that the $3,500 stipend in this case will be taxable income to your son, because it is being used for a non-qualified expense under the grants and scholarships definition of QEE.

If you want to use more 529 money for the $8,000 room and board bill and not pay tax on the 529 distribution, you potentially have options. You could make a 529 payment of $8,000, even though the amount due is only $4,500 because of the $3,500 stipend that has already been applied. The school would probably give you a refund in the amount of $3,500 because of the overpayment. You can then deem this to be a refund of the stipend, and your son can use it for whatever he wants. HOWEVER: if this refund is used for non-QEE (football tickets, airfare, dorm furnishings, etc.), the full amount will be taxable income to your son.