college

What are eligible 529 plan expenses?

Joseph HurleyQuestionDear College Money Guru,
The professor says the students will be reading books X, Y and Z for my daughter's English class and writing essays about them. She buys these books on Amazon.com. Are they qualified expenses for her 529 plan?
-- Renee

AnswerDear Renee,
In general, any books, supplies and equipment costs incurred by a student must be "required" by the postsecondary institution in order to count as qualified expenses for 529 plan purposes. Because your daughter's college professor is making these books part of the English class syllabus, they are eligible for favorable 529 treatment.

Please note that the cost of books and other required course materials can be included along with tuition and fees when claiming the American Opportunity Tax Credit. This credit is worth as much as $2,500 in federal tax savings to an eligible taxpayer. It is computed as 100 percent of the first $2,000 in qualified expenses and 25 percent of the next $2,000 in qualified expenses.

Any expenses counted toward the American Opportunity Tax Credit cannot be included with your qualified 529 plan expenses. Thus, you run the risk that some portion of your 529 withdrawal becomes taxable. However, the 10 percent penalty on nonqualified withdrawals is waived under these circumstances.

I realize this may sound confusing, but that's what happens when the government enacts multiple tax incentives and forces you to choose between them. Planning becomes even more difficult when you consider that the American Opportunity Tax Credit expires at the end of this year, leaving the Hope Credit and the Lifetime Learning Credit in place going forward. And guess what? Books and course materials are eligible for the Hope and Lifetime Learning credits only if the student is required to purchase them directly from the school.

The IRS attempts to provide guidance in Publication 970, which is available to you at no cost at IRS.gov.

Finally, I will mention the two exceptions where expenses can be counted for 529 plan purposes even when not required by the institution:

  • The added costs of a special-needs beneficiary incurred "in connection" with the school.
  • Computer technology, equipment or Internet access and related services if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled.

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