Tax season is officially underway, and individuals are preparing their financial records to get tax returns ready. While 529 plans are relatively low-maintenance savings vehicles, there are times when account activity will need to be included on your tax return. Here are some factors to consider --- and to discuss with a tax professional--- when preparing your tax return:
If you had a withdrawal from your Virginia529 account(s) during 2020, a 1099-Q form was issued for tax purposes. If a withdrawal was made payable to an account owner, a 1099-Q was mailed to the account owner and is available online at Virginia529.com. Simply log in to your account, locate the “View My Account” tab, and select “Tax Information (1099-Q Form)” from the dropdown menu.
If a withdrawal was made directly to the student beneficiary, to a K-12 school or eligible educational institution, the student will receive the Form 1099-Q in the mail. Students also can set up their own login ID at Virginia529.com to view their 1099-Q online.
Reporting 1099-Q Amounts on Your Tax Return
Virginia529 is required to report withdrawals to the IRS with Form 1099-Q. Qualified higher education expenses include tuition, fees, books, computers and related technology, and some room and board costs for students attending an eligible educational institution, such as a college or university.
Families can also take a tax-free withdrawal to pay for tuition expenses at private, public and religious elementary and high schools. This amount is limited to $10,000 per year, per student.
The SECURE Act of 2019 expanded the definition of 529 plan qualified higher education expenses to include costs of apprenticeship programs and qualified student loan repayments. Qualified distributions for student loan repayments have a lifetime limit of $10,000 per beneficiary and each of their siblings. 529 withdrawals spent on other purchases, such as transportation costs or health insurance coverage are generally considered non-qualified.
If the withdrawal(s) taken from your account did not exceed the total amount of your 2020 qualified higher education expenses incurred, you should not need to report the withdrawal(s) on your tax return. If, however, the withdrawal(s) exceeded your total 2020 qualified higher education expenses, consult a tax professional for more information as you may have income tax consequences.
Reporting Contributions on Your Tax Return
If you’ve simply been contributing to an existing 529 account you may not have to report anything on your federal income tax return. Contributions to a 529 plan are not deductible and therefore do not have to be reported on federal income tax returns. What’s more, the investment earnings in your account are not reportable until the year they are withdrawn.
As for state income tax filings, Virginia529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carryforward to future tax years, subject to certain restrictions.
Those account owners who are Virginia taxpayers age 70 and above may deduct the entire amount contributed to their Virginia529 account in one year. In addition, contributions to Virginia529 accounts are treated as a completed gift by the account owner to the student beneficiary. This means contributions up to $15,000 a year, or up to $30,000 if married, may be gift tax free. You should consult your tax advisor regarding the specific tax consequences of contributions.
If you’re expecting a tax refund check this year, consider transforming it into a contribution toward your Virginia529 account. Related: Your Tax Refund Can Equal College Savings