Haveaniceday
Member
- Joined
- Jul 16, 2019
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- 170
Many parents use 529 funds to pay academy expenses, but it is a murky IRS area as the service academies are not considered colleges by the IRS, thus it is best avoided. It comes down to you cannot be a full time student and a member of the military fully employed at the same time. Let me explain:
When it comes tax time, the academy will not send your cadet a 1099-T like a civilian college will showing college expenses that were paid, and allowing you to claim your 529 draw against those 1099-T expenses. When you file taxes, the IRS basically matches the 1099 your state 529 plan issues you with the 1099-T from the college showing the tuition you paid and making you eligible to draw 529 funds. No 1099-T, no authorization for Qualified 529 draws. Service academies will have a Tax training for your cadet, so this will be explained to them. They will be told they are not to file as college students, but rather as members of the military which they are. They will be told they should not be claimed as dependents on their parents return, but to file as independent adults. Many people ask their state plan if they can draw their funds and are told incorrectly yes by the plan, but state law does not govern the federal tax code. The academies will also encourage the cadets to open an IRA either Roth or regular to make them eligible for the Retirement Savers Credit which will usually bring their Fed taxes to zero, and is also a great savings start. I note, if your cadet checks the college student box on the IRS from, they become in-eligible for the RSC; that is why they are told repeatedly not to file as a college student, but rather as a member of the military.
The best way to use 529 funds for your cadet is to take a non-qualified withdrawal where you will owe taxes on the gains you made. Since they are attending a service academy the 10% penalty is waived. This draw, if the check is made out to the cadet, is taxable income to them they must report on their return. But, since they only earn about 15K per year they are in a low tax bracket. You can draw a little each of the 4 years and keep them in a low bracket. If you follow academy advice and open a IRA they you will get access to the Retirement Savers Credit which will bring your tax down further and if done right, to zero with a draw of about 14K of 529 funds per year.
Some people ask, if all this is true, why do the academies allow me to send 529 funds to them to pay for uniforms etc. The answer is because they do not give out tax advice, just like the state 529 plans do not give out tax advice. For all they know, you did this as I described and took a NON-Qualified withdrawal, and everything is fine. If you try to make a qualified 529 draw (not subject to fed tax) and claim you have a full time student, that will conflict with the individual taxes your cadet files from the academy.
This is very complicated, but I hope this at least gives you enough to go to your tax adviser and discuss.
USMA 529 guidance attached below explains this in more detail.
When it comes tax time, the academy will not send your cadet a 1099-T like a civilian college will showing college expenses that were paid, and allowing you to claim your 529 draw against those 1099-T expenses. When you file taxes, the IRS basically matches the 1099 your state 529 plan issues you with the 1099-T from the college showing the tuition you paid and making you eligible to draw 529 funds. No 1099-T, no authorization for Qualified 529 draws. Service academies will have a Tax training for your cadet, so this will be explained to them. They will be told they are not to file as college students, but rather as members of the military which they are. They will be told they should not be claimed as dependents on their parents return, but to file as independent adults. Many people ask their state plan if they can draw their funds and are told incorrectly yes by the plan, but state law does not govern the federal tax code. The academies will also encourage the cadets to open an IRA either Roth or regular to make them eligible for the Retirement Savers Credit which will usually bring their Fed taxes to zero, and is also a great savings start. I note, if your cadet checks the college student box on the IRS from, they become in-eligible for the RSC; that is why they are told repeatedly not to file as a college student, but rather as a member of the military.
The best way to use 529 funds for your cadet is to take a non-qualified withdrawal where you will owe taxes on the gains you made. Since they are attending a service academy the 10% penalty is waived. This draw, if the check is made out to the cadet, is taxable income to them they must report on their return. But, since they only earn about 15K per year they are in a low tax bracket. You can draw a little each of the 4 years and keep them in a low bracket. If you follow academy advice and open a IRA they you will get access to the Retirement Savers Credit which will bring your tax down further and if done right, to zero with a draw of about 14K of 529 funds per year.
Some people ask, if all this is true, why do the academies allow me to send 529 funds to them to pay for uniforms etc. The answer is because they do not give out tax advice, just like the state 529 plans do not give out tax advice. For all they know, you did this as I described and took a NON-Qualified withdrawal, and everything is fine. If you try to make a qualified 529 draw (not subject to fed tax) and claim you have a full time student, that will conflict with the individual taxes your cadet files from the academy.
This is very complicated, but I hope this at least gives you enough to go to your tax adviser and discuss.
USMA 529 guidance attached below explains this in more detail.