529 Plans That Bite
The reason why so many people gravitate to 529 plans is their celebrated tax benefits. And here’s one of the biggies: You don’t have to pay Uncle Sam when you withdraw cash from a 529 plan for college.
Unfortunately, some families will discover that this tax reprieve isn’t airtight. Parents will owe taxes if the 529 money they withdraw exceeds their so-called qualified higher education expenses. These costs include tuition, mandatory fees, required books, and supplies. If the child is attending school on at least a half-time basis, the room and board is also thrown into the calculation.
If your 529 withdrawals exceed these allowable costs, you’ll have to report a portion or all of the account’s earnings on your next income ...
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