Investing money into a 529 plan can be an effective strategy to save for college. There are, however, some overlooked nuances related to some 529 plan distributions. And often times, those nuances are not addressed (or even discovered) until after the distribution has occurred and you are stuck paying taxes unexpectedly.
To make the discussion with clients easier, there is the “Is The Distribution From My 529 Plan Taxable?” flowchart. It covers some of the most common issues for individuals who are planning to take a distribution from the 529 plan. This flowchart considers:
What kinds of expenses qualify
Tax impact if the expense is nonqualified
Consideration if the beneficiary is disabled
The formula for calculating Adjusted Qualified Education Expense (AQEE)
Impact of American Opportunity Tax Credit and Lifetime Learning Tax Credit
The formula for calculating the tax associated with any distribution (if applicable)
Updated: 7/15/2019