529 Plan

[ILLMAS]

First time one of my client will be tapping into a plan to help a family member cover tuition, and I have some questions, maybe someone here has some experience on it.  I read the general rules but just want to make sure my client is not taxed or penalized for not following the proper procedures:

1.  Just as long the custodian does not exceed a $14,000 contribution to a beneficiary per year, there is no need to file a gift-tax return correct?

2.  After the monies are deposited into the family member school of choice, is there anything else the custodian has to do?

3.  I have an understanding that if the beneficiary does not use the money towards tuition, the beneficiary would be on the hook for the tax and the school will issue the equivalent of a 1099, not the custodian?

4.  Besides a possible gift-tax, is there something else the custodian needs to know about?

Thanks

MAS

[SaraEA]

The gift tax exclusion for 2018 is $15k.  The donor can contribute $75k and elect to have it considered donated over a 5-year period, thus avoiding gift tax.  The custodian is the firm that runs the 529 plan; your clients are likely the owners and the family member is the beneficiary.  The school will not issue a 1099, only the custodian will.  It is up to the taxpayers to reconcile the distribution on their tax return.  This is an area of audit.  As long as you have the financial statement from the school showing what was paid for what, no problem.

Note that 529 plan distributions can be used for room and board, which the education credits cannot.  I've had clients who have gotten into trouble because they paid the entire bill from the college from the 529.  If they are eligible for the AOC, $4k is used for the credit and can't be counted as a qualified education expense from the 529 (no double dipping).  Example:  Tuition is $20k and room and board is $8k, so $28k is taken from the 529.  For the AOC, $4k is used.  Thus the qualified ed expenses for the 529 are $24k--but they took out $28k, so the earnings portion of the $4k is taxable.