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Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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I originally opened a 529 account with 3000.00 in 2002. I

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I originally opened a 529 account with 3000.00 in 2002. I took it back out in 2003 leaving just the interest in it, about 300.00. I didn't know I should have paid a 10% penalty since I didn't use it for educational purposes, but for hardship. So my question is how do i pay that NOW, to avoid trouble AND do I owe regular taxes on it since it was the original amount I put in there?
Submitted: 5 years ago.
Category: Tax
Expert:  Bill replied 5 years ago.
Did you receive Form 1099-Q for 2003? Were there amounts in boxes 1, 2, and 3? Has the IRS recently sent you an inquiry about this?
Customer: replied 5 years ago.

I never received the 1099-Q. I just learned about it this month when i closed down the other 529 account for my daughter. No, I haven't heard from the IRS, but now that I know about the penalty and the potential taxes that should have been paid, I'm trying to take care of it before they DO try to get a hold of me about it.

Expert:  Bill replied 5 years ago.

Since the IRS has not already contacted you, it is unlikely that the they will contact you about this because it is 6 years ago and 529 distributions are only reported by a taxpayer on a tax return if the earnings are not used to pay college expenses. The only way that the IRS would presume that the earnings were not used for college is if they did not receive a copy of Form 1098-T from a college institution.

 

The 529 plan should have sent you a 1099-Q reporting the distribution, earnings, and basis amounts. If the account was worth $3,300 and the distribution was $3,000 then the basis portion of the distribution would be approximately $2,727 and the earnings would be approximately $273. Hence, you should have reported $273 as earnings on your return and Form 5329 should have been filed to report and pay the penalty tax of $27 (10% of the earnings).

 

If the check was made payable to your daughter, then the 1099-Q would have included her name and social security number as the recipient and the earnings would be taxable to her.

 

http://www.irs.gov/pub/irs-prior/f1099q--2003.pdf

 

http://www.irs.gov/pub/irs-prior/f5329--2003.pdf

 

 

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
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