Can a client recontribute a partial college tuition refund to a 529 plan?

Question of the week: Our clients got a partial refund of their child’s tuition expenses paid from a 529 plan. Is it taxable? Can they put the refund back in the 529 plan?

May 07, 2020

Q. Clients paid their daughter’s tuition with 529 funds but received a partial refund as a class was canceled due to coronavirus and her dorm was closed. Is the refund amount taxable or can they just sign over the refund back to the 529 plan?

Our clients’ daughter started her freshman year at college last fall, and they’ve been using 529 funds to pay her tuition. The college had to close the campus this spring because of coronavirus. They just received a refund of part of the last 529 withdrawal representing one canceled class and room and board for the rest of the spring semester. (Their daughter is home and completing the rest of her spring classes online.) Is the refund taxable? Or can they just sign the refund over to the 529 account or make a contribution for the same amount?

A. Your clients can redeposit the refund amount without tax consequences to the 529 plan the later of July 15, 2020, or 60 days after the date the refund was issued. Or, they can use the amount for qualified education expenses later in the same year.

Your clients can redeposit the refund they received from the school to the 529 plan. Ordinarily, the refund must be redeposited within 60 days after the refund was issued. However, IRS guidance following the COVID-19 emergency gives your clients additional time to redeposit the refund. To avoid tax consequences, the refund should be redeposited the later of:

  • July 15, 2020, or
  • 60 days following the refund issue date.

Before signing over the refund or contributing the same amount, it is best to check their 529 plan website or contact their plan administrator to find out what the procedures are for recontributing funds. For instance, their plan may have a form to complete or other redeposit instructions

The 529 plan will send Form 1099-Q showing the full 529 plan withdrawal (i.e. not reduced by the refund amount). Your clients should keep copies of the refund check and letter from the school as well as copies of their redeposit check and any forms they completed or other instructions with their tax records. Note that the recontribution does not count toward any lifetime 529 plan contribution limits or the annual gift tax limitation.

Alternatively, rather than withdrawing more 529 funds later this year, your client can use the refund amount to pay qualified expenses for summer or fall classes. They could also rollover a like amount to a 529 plan set up for another family member, such as a younger son or daughter.

If the refund is not redeposited, used for other qualified expenses, or rolled over to another 529 or ABLE account the earnings portion of the refund will be subject to tax and may be subject to the 10% penalty as well. The taxable portion of the distribution would be reported on their daughter’s tax return. See “are distributions taxable?” in IRS Pub. 970, Tax Benefits for Education.

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