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If possible, Seth should return the refund to his 529 plan within 60 days and it won’t be taxable. However, if he misses the 60-day window,it gets complicated and the refund may be taxable. He may also owe a 10% penalty for failing to use 529 funds for qualified expenses unless he meets one of several exceptions. Taxability largely depends on whether Seth received any tax-free educational help from things like scholarships, veteran’s benefits, Pell grants or employer provided assistance that offset his qualified education expenses.
Seth should also look for other qualified expenses he incurred. If he bought a laptop and pays for internet service to use for distance learning, these qualify and can be used to offset the refund.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.
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