Avoiding tax problems from college refunds due to Covid-19
If you received a refund from college for room and board or other expenses, consider yourself lucky. But beware the potential tax bite. As colleges and universities across the U.S. remain closed in an effort to slow the spread of Covid-19, refunds for meals or housing have varied from school to school, but if you received a reimbursement check, there is one thing you should do.
If that money was originally paid out from your 529 college savings plan, you should re-contribute those funds to the same qualified tuition program. That way, it will remain tax- and penalty-free. If you don’t put the money back in your 529, it could be considered a non-qualified distribution, which comes with a 10% tax penalty in addition to income taxes on the account’s earnings. That could add up, considering the average annual cost of room and board at public colleges is $11,500 and nearly $13,000 at private schools, according to the College Board.
If the money deposited back in the 529 leaves a balance beyond what is needed to pay for school, any funds left over can be used for education expenses down the road, whether that is next semester or for post-undergraduate studies at a later date. Money still left in a 529 plan can also be transferred to a sibling or even saved for a grandchild.
Mike Bink, AAMS®, CCFS®
Mike works with families to simplify the college funding process and is widely recognized as an expert in college planning. He is passionate about empowering families to become informed consumers of higher education so that they don't pay a penny more for college than they absolutely have to.