January 20, 2016
When David and Miyuki Nishijima bought their son James a computer for his freshman year at California Polytechnic State University—San Luis Obispo in the fall, they couldn’t use funds from his college savings account to foot the roughly $2,400 bill.
But that changed in late December, when Congress passed long-awaited legislation making computers and related equipment a qualified education expense under 529 plans, or tax-advantaged college savings accounts. Withdrawals that don’t qualify are subject to taxes and penalties.
The Nishijimas may have been among the first to take advantage of the new law – which took effect retroactively on Jan. 1, 2015 – withdrawing the funds from James’ 529 plan in late 2015 and reimbursing themselves for the cost of the Macbook.
Calling it a “significant expense for college,” David Nishijima says it was nonetheless a necessary one for his son, who is an electrical engineering major.
“These days it’s so core,” he says.
The legislation does two other things regarding 529 plans: It allows account owners who take a withdrawal but then get a refund from the school – for instance, because their child gets sick and has to drop out for the semester – to redeposit that money in the 529 plan within 60 days with no penalties. It also changes reporting standards that apply to account holders with more than one plan per beneficiary.
Here are answers to questions about the new legislation.
1. What exactly is included under the new computer provision? The definition of qualified education expenses expanded to include computer and peripheral equipment, computer software or Internet access and related services, to be used primarily by the designated beneficiary of a 529 account while enrolled at an eligible educational institution.
2. So, what’s a computer? “It’s pretty clear a desktop and laptop are a computer,” says Jamie Canup, a partner and chair of the tax practice at Hirschler Fleischer in Richmond, Virginia, and member of the College Savings Plans Network.
Tablets, such as an iPad, also fall under the definition of a computer, says Randy Hardock, a partner at Davis & Harman in the District of Columbia, and counsel for the College Savings Foundation.
3. What’s peripheral equipment, software and Internet access? Peripheral equipment is defined as auxiliary machines designed to be placed under control of the central processing unit of the computer. This includes printers, both Canup and Hardock say.
Exceptions include typewriters, calculators, adding and accounting machines and copiers.
While software is included, there are exceptions for software designed for games, sports and hobbies, unless it’s predominantly educational in nature, Hardock says.
Beneficiaries will also be able to use 529 funds to pay for Internet access, but Hardock says to check with a tax professional if the Internet bill comes bundled with other services, such as cable.
4. Since the legislation is retroactive to Jan. 1, 2015, can I withdraw funds now to pay for a computer I purchased last year? The rules aren’t clear once you cross the calendar year. The Nishijimas took advantage of the small window between the time the legislation passed and the end of the 2015 calendar year to get a reimbursement, but Canup says he wouldn’t risk trying to do it now that it’s 2016.
“Most tax advisors tell their clients: ‘Make sure your expenses and distributions occur in the same year,'” he says.
However, any college-related computer purchases in 2016 and beyond can be paid with 529 distributions.
5. Can I still redeposit funds if I got a refund from a school in 2015? Yes. Congress included a special rule that states that account holders have 60 days from the date it became law, Dec. 18, to redeposit a refund from 2015 into a 529. That brings investors to Feb. 16.
Still, account holders would be wise to hurry.
“They’re running out of time,” Canup says. “They’ve got to be aware of the rule. They have to take the money if they still have it and recontribute it.”
6. What are the new reporting standards, and will they affect me? The change in reporting affects only those account holders with more than one 529 account for the same beneficiary.
Most 529 accounts are made up of money from contributions and earnings. Under the old rules, plan administrators aggregated all accounts with the same account holder and beneficiary, but under the new rules, each 529 account will maintain its own discrete ratio of contributions and earnings.
This is good news for account holders, Canup says, because it allows them to cherry-pick where withdrawals are coming from. This matters because only earnings are subject to taxes and penalties for withdrawals that don’t qualify as educational expenses.
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