My daughter withdrew money from the 529 for College in 2019.

Now in 2020 with COVID-19 and schools closing, she has received a refund.

Would like to just put the money back into the 529, but how does this affect the 1099Q or other tax related documents?

What special steps would there be for properly handling this refund from 2019 withdrawn funds?

No clear guidance on this type of problem, yet. But, I imagine it will be forthcoming. My guess is that they will allow the refund to be put back into the account without consequences. But, that's a guess.

Will she have sufficient out-of-pocket QUALIFIED expenses in the fall to offset the refund? If so, I would argue that the money came back to her in 2020 and was spent on qualified expense in 2020 so no harm no foul.

Nothing to report as I presume that the 2019 withdrawal on the 1099-Q was accounted for by a payment equal or in excess of the withdrawal so properly accounted for as a non-taxable distribution in 2019.

Remains to be seen what the schools will report, if anything, on the refund. But if they did report something in 2020, potentially income, I would simply attach a statement to the 2020 return detailing the specifics of the transactions and not pick up the income. Nobody has yet thought about this complication.

I am a CPA.

Is she returning this fall? If so - she can just apply the refund/credit towards her fall tuition.

529 withdrawals are not reported on your tax return. (oddly). You just need to maintain documentation in the event you receive an IRS inquiry in future years.

We're planning to re-use our refunded housing dollars in the fall.

She can reuse the money this fall.

However, I don’t want to leave it in cash as I expect some recovery in the stock market prior to this fall.

Seems like we should be able to reinvest it in the 529 without any issue, but as Salior1911 indicated there does not seem to be any clear guidance from tax advisers nor financial advisers.

Went through this with Vanguard last year. This is all according to Vanguard.

#1) you have 60 days after getting the refund money to return it into the 529, per the "PATH Act". If you wait too long, you can't legally put it back in. see item 2 in this link

#2) Customer support at the administrator of your 529 will give you details on how they handle these returns. For the Nevada Vanguard 529, the check had to be accompanied by a letter with specific details, including a specific reference to the "PATH Act".

#3) For Vanguard, at least, don't expect their systems to be able to report the return correctly on next year's 1099-Q. Their 1099-Q shows the gross amount of withdrawals, including the money that you returned. And it shows the returned money as 'contributions'. Vanguard said that the correction is 'done by your tax preparer' - to give them a copy of the letter that accompanied the check - but gave no further instructions. (To me, this seemed a major cop-out, sending the Feds an incompletely-accounted-for 1099-Q but it is what it is.)

#4) If you are sure you are going to use these funds this year for qualified expenses anyway, then none of the above matters, as the reporting is on a yearly basis and you will have withdrawn it and used it during the same calendar year.

quote:

Originally posted by Graniteguy:
529 withdrawals are not reported on your tax return

They are, it's just buried (Form 5329 & Schedule 1, line 21, if applicable) and you only report 'non-qualified' withdrawals. Also, the IRS forms call them 'QTPs' instead of '529s' - go figure.

As my tax guy explained it, essentially, if those lines/forms don't show any taxable income entry - which, if you've been using the withdrawals for qualified expenses as intended, you wouldn't - you've signed a 1040 claiming you had zero taxable withdrawals from your 529.