Obviously, the aftermath of taking advantage of fantastic deals all year long, is dealing with all the tax paperwork.
We’re working on sifting through the tax impacts from each of our free money deals.
Today we’re tackling 529 plans, and specifically my favorite, the Ohio College Advantage 529 plan.
A reader Julie, sent in the following question:
Just wondering if you could help navigate the tax reporting issues for the CollegeAdvantage 529 plan.
I have received a 1099-MISC form with the bonus incentive amount included in box 3 – other income. However, according to Publication 525, “The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is a return of the investment in the program.” So, do I report that bonus money as income?
I’ve also received several 1099-Q forms as I withdrew the total amounts of several accounts after the bonus money was deposited, and I understand I have to pay 10% on the earnings portion because the money was not used for qualified education expenses. The incentive monies they paid out to me is just tripping me up on how to report.
Great question Julie! Let’s tackle each topic separately, then pull it all together to figure out how to handle this one.
529 Plan Sign Up Bonuses
As Jill discussed yesterday, sign up bonuses are taxable.
This includes sign up bonuses for 529 plans. And I’m sure many of you racked up the bonuses in the College Advantage $25 Sign Up Bonus.
If you signed up lots of friends and relatives for the bonuses, you’ll get a 1099-MISC showing your bonus amount. If not, you’ll just need to look on your year end statement to see how much bonus money you received last year.
Report the sign up bonus as income. You have two options for reporting the income, depending on how you were earning the sign up bonuses:
- Report as other income on line 21.
- Report as business income (which is subject to both income tax and self-employment tax) on Schedule C. If you report it as business income, you can deduct any business expenses that you incurred to earn the income.
Classify your sign up bonus as a contribution. After reporting the income, count it as a contribution for the year for the 529 plan (which will be important for future withdrawals). Hopefully, the 529 plan will be recording this for you, but I like to keep track of my contributions in my notes, especially since this information often gets misplaced when you rollover your account into another plan.
529 Plan Withdrawals
If you take 529 plan distributions, you should get a 1099-Q. Here’s how to handle the withdrawal when you didn’t use it for educational expenses, or withdrew more money than you were eligible to for qualified higher education expenses:
- Report your earnings (which should be in box 2 on the 1099-Q) on Form 1040, line 21.
- In addition, report the 10% penalty on the earnings using Part II of Form 5329, which will flow to Form 1040, line 58.
As Julie pointed out in her question, the principal amount of the withdrawal, which includes the sign up bonuses above since they are already taxed, is not subject to additional taxes or the penalty.
What do you do if you don’t get a College Advantage tax statement?
If you just did a few referrals, you aren’t going to get a 1099, since the threshold for 1099-MISC is $600. However, it’s still taxable, so you need to report it.
College Advantage Tax Example
Let’s work through an example to illustrate the situation many of you might be in after the bonuses last year.
Let’s say I opened two accounts, with myself as one beneficiary and my husband as the other. I contributed $25 to fund each account, then earned $100 ($25 on each account, plus a $50 referral on my account) in sign up bonuses. Then, I cashed out both accounts valued at $110 and $55.
Here’s how it would look:
- $100 reported on line 21, other income, for the sign up bonuses.
- $15 in earnings ($165 less $50 contribution and $100 sign up bonus turned into a contribution) reported on line 21, other income.
- $15 in earnings reported on form 5329 subject to the 10% penalty.
I hope that helps Julie! Now, if only they would bring back the College Advantage bonuses again!