Husband took from Wife's 529, but there's more

[Possi]

I have a 1099Q in the wife's name. Box 1 distributions are $5000. Earnings in box 2 are $2018, and Basis in box 3 is $2982.

There's a lovely note here saying her husband "pulled money from here to pay his college tuition. When the college funds were reimbursed, we put all the money back into the 529."

Wait, there's more...

This is followed by a 1098T in the husband's name. Box 2, amounts billed was $2440. Scholarships or grants is $1900.

Wait for it, there's more...

There's another lovely note attached saying, "(husband) paid for 1 semester of schooling. He didn't complete the semester, so 80% of the funds were returned."

It looks to me like he doesn't qualify for any education credit. Billed tuition minus scholarships is only $540. If 80% was reimbursed, he only paid $108 for classes he didn't even complete. So, no education credit. It's obvious he didn't use $5000 that he took out of her account for education.

As I see it, $2018 goes on L 21 and $202 on L 59 for the 10% penalty.

I think her notes were just an attempt to blow this off all together.

Can I get a discussion or confirmation? Am I right?

 

[jklcpa]

I think you are correct.  No education credits because he dropped out so he isn't at least 1/2 time for the AOC, and he wasn't enrolled for at least one semester for the LLC

No relief from the taxable portion or penalty on the 529 withdrawal if they put the money back in to the same 529 plan. If they put it into a new plan within 60 days it would qualify as a rollover.  

[Possi]

11 hours ago, jklcpa said:

I think you are correct.  No education credits because he dropped out so he isn't at least 1/2 time for the AOC, and he wasn't enrolled for at least one semester for the LLC

No relief from the taxable portion or penalty on the 529 withdrawal if they put the money back in to the same 529 plan. If they put it into a new plan within 60 days it would qualify as a rollover.  

That's interesting! I didn't even think of the rollover. I will ask them, but she already said they put money back into that same account. He borrowed from it and blew it, I think.

Thanks for the teaching moment!

[jklcpa]

44 minutes ago, Possi said:

That's interesting! I didn't even think of the rollover. I will ask them, but she already said they put money back into that same account. He borrowed from it and blew it, I think.

Thanks for the teaching moment!

It almost seems like they got advice from somewhere or tried to look it up themselves because of the wording of wife's note.  There are times when putting money back into the same account is allowed, but not for your client.  Take a look at sec 529 (D) where it says that sec (A) doesn't apply in the case of beneficiary who receives refunds of tuition that are recontributed. 

I didn't mention it because the way I read paragraph (D) is that it would only apply if the wife was the one receiving the refund, and in your case the husband was the one with the refund, and he was not the beneficiary of the 529 account.

[Possi]

2 minutes ago, jklcpa said:

It almost seems like they got advice from somewhere or tried to look it up themselves because of the wording of wife's note.  There are times when putting money back into the same account is allowed, but not for your client.  Take a look at sec 529 (D) where it says that sec (A) doesn't apply in the case of beneficiary who receives refunds of tuition that are recontributed. 

I didn't mention it because the way I read paragraph (D) is that it would only apply if the wife was the one receiving the refund, and in your case the husband was the one with the refund, and he was not the beneficiary of the 529 account.

Yes, when her name was on it, and he is the one who used it, I knew I had a problem. Then, when I got to "page 3" of their package and saw that 1098T with the love letter saying he didn't even complete the classes, that was it. Thank you for steering me to the documentation backing up the position.