529 Withdrawal Calculation and Student Loans

[TC12]

Assume dependent student has $30k in tuition and related fees and room and board for the year.  Assume the entire $30k would qualify for a nontaxable withdrawal from a 529 account.  If the student borrows $5k in student loans and the parents pay the remaining $25k from their bank account, how much can parents withdraw from 529 account for the year to reimburse themselves?  It would seem that the entire $30k can be withdrawn from the 529 account tax-free BUT the loan would not qualify for the student loan interest deduction and the remaining 529 funds could not be used (later in time) to repay the $5k loan.  In essence, it seems that the "student loan" isn't a student loan anymore but just a regular loan.  See, for example, IRC section 221(d)(2).  Thoughts?

[qbteachmt]

"In essence, it seems that the "student loan" isn't a student loan anymore but just a regular loan."

You withdraw funds meant for school, but didn't pay off the loan, so unless the costs of the loan (and school) are more than that withdrawal, of course you cannot write off the interest, and you can't take out more 529 money later to repay the loan, because:

You already took that amount for that supposed reason out of that account; and,

You already got "repaid" for the loan, by your initial withdrawal, so you don't also get to write off the interest as a double benefit.

What you have, in essence, as the Net, is: borrowed as school loans, then used that as an excuse to remove 529 funds falling under the tax-free umbrella, but then you didn't follow through. You don't get two shots at the same benefit.

[TC12]

I didn't ever intend to repay the $5k loan with the $30k withdrawal.  I withdrew the $30k because I had education expenses of $30k.  On my facts, I believe I could still withdraw $10k on some future date to pay off student loans BUT I just could never withdraw any money from my 529 plan to pay off the $5k loan because it isn't a "qualified education loan" under section 221(d)(1) and section 529(c)(9).  The real point of the question, however, was whether section 529 would require me to reduce the original distribution to $25k or whether I could withdraw the entire $30k tax-free.  I believe I can withdraw $30k tax free and I don't see anything in section 529 that would say otherwise.  

[qbteachmt]

"I didn't ever intend to repay the $5k loan with the $30k withdrawal."

Exactly; yet, that's the only reason you are entitled to Tax Free withdrawal from a 529 plan account = for school expenses. So, if you didn't pay them with the 529 funds, you paid them with the loan that you used to justify the withdrawal of the 529 funds. Then, you didn't use them like that. That doesn't absolve you of the facts, and that doesn't open the door to a Second benefit of writing off school loan interest in addition to having made that withdrawal tax free.

"I withdrew the $30k because I had education expenses of $30k."

I? Are you not a tax preparer asking about your Client's scenario?

You stated this: "Assume the entire $30k would qualify for a nontaxable withdrawal from a 529 account."

It isn't clear what you are trying to accomplish. You can't get Double Benefit from anything here.

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support.

Thanks.

[TC12]

I know the purpose of this site.  Not sure why you are so confused by "I" since it doesn't matter who the person is making the withdrawal.  Your response uses a lot of pronouns (e.g., "them") that make your response difficult to follow but I don't think your analysis is correct.  The loan doesn't justify a tax free withdrawal from section 529.  The payment of education expenses (whether through a loan or otherwise) justifies the withdrawal from the 529 plan.  I believe on these facts that the following are true:  (1) $30k can be withdrawn from the 529 plan tax-free; (2) the $5k loan isn't a "qualified education loan" within the meaning of section 221(d)(1) and section 529(c)(9); and (3) that $10k could be withdrawn from the 529 plan in later years to repay "qualified education loans" (but not the $5k loan).    

[qbteachmt]

"didn't pay them" = the School expenses referred to in that sentence.

"The loan doesn't justify a tax free withdrawal from section 529." Because 529 use is based on Expense; not Borrowing. Better stated: the justification for the withdrawal has been made. Taking a Loan is for whatever use you want, which can even be more school costs. But not for the same school costs as justified the 529 withdrawal. You know it isn't paid for twice.

"I know the purpose of this site."

It's in support of Intuit's Programs used by paid tax preparers. Are you using Lacerte, ProSeries or ProConnect? Or, just seeking tax advice? Because it is not for personal tax advice. You've only posted in this Peer User Community about 529 plans and student support and loans. You don't seem to have any issues using your Intuit Tax Preparation programs or how tax law changes might affect your clients or your practice? Because that is the purpose of this site.

[TC12]

Could you please point me to the site community guidelines that provide that this site is only for issues with my Intuit Program or changes in tax law?  My apologies.  I didn't realize the purpose of the site was so narrow.  

[qbteachmt]

"that provide that this site is only for issues with my Intuit Program or changes in tax law?"

Well, that's this Peer Community. At the top, you can see where you posted your two participation topics is:

"https://proconnect.intuit.com/community/tax-talk"

Which is Hosted by Intuit, provided by Intuit, is for their "proconnect" community (Lacerte, ProConnect Tax Online, and ProSeries programs)  and the Tax Talk section is for issues related not to how the program(s) function, but the tax issues. It's also seen at the top that this is:

• Intuit Accountants Community
• Industry Discussions
• Tax Talk

As a hierarchy.

And lastly, that wording I provided, and is once again here:

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support.

Thanks.

is entered here from a Macro, provided to us by Intuit, as they asked us to Redirect folks looking for personal tax guidance, to go to the Intuit TurboTax Communities, where they maintain tons of forum and subforum on various topics related to personal and business finance, tax issues, and other issues as relates to Intuit's intent to manage their communities. Intuit provides a lot of these communities. It helps to go to the right one for your issue.

Which is why you got a redirect request.

[TC12]

"You don't seem to have any issues using your Intuit Tax Preparation programs or how tax law changes might affect your clients or your practice? Because that is the purpose of this site."

Again, please provide a link to the guidelines of the peer community that states that this peer community is only for issues using my Intuit Tax Prep program or how tax law changes might affect my clients or my practice.  That is what your prior post said.  I don't need you to tell my where I am posting or that Intuit hosts the site.  Your prior post was not responsive.  Thanks!

[qbteachmt]

You can use the Web to search on Intuit Terms and Conditions, if you want to read it. You can read the community Help listing here, top right corner, for yourself, as well. It has FAQs.

"Your prior post was not responsive."

Well, that's clearly wrong. I have twice posted the macro redirect as provided to me (and the other frequent Peer Volunteers here) by Intuit, for use when someone is lost on the internet.

You read this and didn't respond: "Are you not a tax preparer asking about your Client's scenario?"

You never stated you are an end user of the programs this community was created to support. I don't know your profession, but you are here twice now, and it's been noted that if that is asking for personal tax guidance and advice, you are lost on the internet. Essentially, barging into other people's offices.

At the TurboTax Communities, Intuit intentionally has a more social structure to their subforum and topics and blogs and articles.That's why Intuit specifically provided that redirect for us to offer here.

You are encouraged to use the IRS resources, as well:

https://www.irs.gov/forms-pubs/about-publication-970

[TC12]

I give up.  You clearly are refusing to respond to my prior post.  I've read the guidelines for the peer community and nowhere does it say that this forum is only for issues with my tax prep software and discussion of changes in tax law.  Since you won't provide any evidence for your prior statement (and because there are countless posts asking about general tax issues we encounter as tax professionals), I'm convinced you are wrong and I won't engage with you any further.

I've also found nothing on the community guidelines that indicate I'm required to report to you who my clients are and which Intuit tax prep software I use.  Good luck and happy holidays.