As students head back to campus for a new semester, another expense can now be covered by their 529 college savings plans: a computer and related software and equipment. This is one of several changes to the use of 529 plans that was passed as part of the large, omnibus tax legislation, known as the PATH Act, that was signed into law in December 2015.
The PATH Act extended or made permanent a wide range of business and individual tax credits, deductions and incentives. The 529 changes may have received less attention than other components of the bill, but they are equally as important to students and families working hard to save and pay for college tuition and related costs.
Computers now considered qualified higher education expense
Distributions from a 529 plan are tax-free when used to pay for qualified higher education expenses, such as tuition, room and board, fees, books and special needs services. Computers were not considered part of this category, unless it was a requirement by the school. The PATH Act permanently categorized computers, related equipment, software and internet access as qualified higher education expenses.
Provided the computer and software is used primarily by a student currently enrolled in an eligible educational institution, it may be paid for with a distribution from a 529 plan. Computer games or software unrelated to education do not qualify.
Contributions of refunds permitted within 60 days
The PATH Act also made it easier for refunds to be added back into a 529 account without tax consequence. There are various reasons a college or university would refund tuition or other expenses, such as illness forcing a withdraw early in a semester. In these cases, the refunded amount may be recontributed to the 529 account within 60 days after the refund date. Otherwise, the original distribution may be retroactively considered a nonqualified withdrawal by the IRS that is subject to income taxes and a 10 percent penalty.
It is important to note that the amount recontributed must equal the amount of the refund. Another best practice is to retain documentation supporting the refund and the recontribution in case of scrutiny. Specific 529 plans may have slight differences in the application of this policy, so be sure to check with your plan provider and your tax advisor for guidance.
These changes are the latest enhancements to the popular 529 college savings vehicles. Contact your RKL tax professional or RKL Wealth Management financial advisor with any questions or for more information.