I have searched Google, IRS site, this forum and have not found an answer.
The tax payer, Bob, has a child, Timmy, who is a 1st grader at a private school. In the calendar year 2023, Timmy enrolled in a private school and also received a scholarship to help pay. Timmy received a K12 tuition bill of $12,000, with a $6,000 scholarship, meaning the actual payment due was $6,000.
Bob withdrew $10,000 (because there was going to be a Spring 2024 semester bill as well, so Bob withdrew all $10k mistakingly in one calendar year when he should have waited until the 2024 calendar year to withdraw the second half.
$10,000 is the max you can withdraw from a 529 to pay for qualified educational expenses. Recap: Bob had a $12,000 tuition bill, but only had to pay $6,000 due to financial aid.
Fast forward later in 2024, Bob receives a 1099-Q. The 1099-Q shows the withdrawal of $10,000, and says that $8,000 is basis and $2,000 is earnings.
Bob realizes he made a mistake in excessive withdrawals and wants to amend his return to own up to this and pay back the taxes owed on that excessive withdrawal.
Bob withdrew $10,000 instead of the $6,000, so he had an excess withdrawal of $4,000.
Since the earnings was 20% of the withdrawal, Bob figures that 20% of a $4,000 excess is $800. So the 10% penalty would be $80, plus he has to add $800 to his AGI and submit a 1040X.
Bob isn't quite sure, and consults some free tax software to run the calculation for him.
The free tax software calculates it differently. Instead of starting with a $12,000 tuition bill and subtracting the aid, the free software says "the adjusted tuition and educational expenses can never exceed $10,000, regardless of what the net bill would be after financial aid" and so it subtracts the $6,000 aid from $10,000, meaning that Bob only had $4,000 of expenses. This means that in withdrawing $10,000, it was a $6,000 excess, which means $1,200 is taxable, which is a $120 penalty.
So which method is correct? Is the Subtract-Aid-From-10000-Max method in calculating adjusted tuition expenses correct, or is the Net-Tuition-After-Aid-10000 Max method correct?
I was unable to find a straight answer anywhere on the internet or IRS docs after exhaustively searching.
The tax payer, Bob, has a child, Timmy, who is a 1st grader at a private school. In the calendar year 2023, Timmy enrolled in a private school and also received a scholarship to help pay. Timmy received a K12 tuition bill of $12,000, with a $6,000 scholarship, meaning the actual payment due was $6,000.
Bob withdrew $10,000 (because there was going to be a Spring 2024 semester bill as well, so Bob withdrew all $10k mistakingly in one calendar year when he should have waited until the 2024 calendar year to withdraw the second half.
$10,000 is the max you can withdraw from a 529 to pay for qualified educational expenses. Recap: Bob had a $12,000 tuition bill, but only had to pay $6,000 due to financial aid.
Fast forward later in 2024, Bob receives a 1099-Q. The 1099-Q shows the withdrawal of $10,000, and says that $8,000 is basis and $2,000 is earnings.
Bob realizes he made a mistake in excessive withdrawals and wants to amend his return to own up to this and pay back the taxes owed on that excessive withdrawal.
Bob withdrew $10,000 instead of the $6,000, so he had an excess withdrawal of $4,000.
Since the earnings was 20% of the withdrawal, Bob figures that 20% of a $4,000 excess is $800. So the 10% penalty would be $80, plus he has to add $800 to his AGI and submit a 1040X.
Bob isn't quite sure, and consults some free tax software to run the calculation for him.
The free tax software calculates it differently. Instead of starting with a $12,000 tuition bill and subtracting the aid, the free software says "the adjusted tuition and educational expenses can never exceed $10,000, regardless of what the net bill would be after financial aid" and so it subtracts the $6,000 aid from $10,000, meaning that Bob only had $4,000 of expenses. This means that in withdrawing $10,000, it was a $6,000 excess, which means $1,200 is taxable, which is a $120 penalty.
So which method is correct? Is the Subtract-Aid-From-10000-Max method in calculating adjusted tuition expenses correct, or is the Net-Tuition-After-Aid-10000 Max method correct?
I was unable to find a straight answer anywhere on the internet or IRS docs after exhaustively searching.
Statistics: Posted by jasmino — Fri Jun 14, 2024 6:24 pm — Replies 1 — Views 136