Spring Semester Refunds May Be Taxable Without Swift Action

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Spring Semester Refunds May Be Taxable Without Swift Action

By: Dean Dorton | April 30, 2020

COVID-19 | COVID-19 Industries | Higher Education

In response to the Coronavirus pandemic, many colleges and universities are shutting down their campuses and transitioning to online learning. As a result, students and parents are being provided refunds for unused tuition, including room and board. These refunds may come with an unexpected catch:

If you or your college student paid for these expenses using withdrawals from a qualified 529 plan, you could be subject to tax and penalty on that refund. 

Since the refunded amounts are not being used for qualified education expenses, the IRS can characterize them as taxable distributions and tack on a 10% penalty. To avoid this, 529 plan account owners should consider re-contributing the refunds to their 529 plans sooner rather than later. 

Generally, the refunds must be re-contributed to the plan within 60 days of receipt to avoid tax and penalties. However, if that deadline falls on or after April 1, 2020, and before July 15, 2020, you have until July 15 to replace the funds under Notice 2020-23, released by the IRS on April 9.

If you are expecting a refund from a higher education facility, you may want to determine if you have other qualified education expenses to offset the amount distributed. If not, consider contacting your 529 plan administrator to discuss repaying the funds in order to avoid unexpected tax and penalties.

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