Alabama’s CollegeCounts 529 program experienced three tax law changes in 2015. If you already have a CollegeCounts 529 account, you should have received notification of the changes on your December 31, 2015, quarterly account statement. The changes, while not implemented until late 2015, are retroactive to include the 2015 taxable year.
Please note, the below changes only affect Alabama’s CollegeCounts 529 program. If you maintain a 529 plan in another state, be sure to review the rules that apply to that state-specific plan.
Q: Is a computer a qualified expense?
A: For taxable years 2015 and beyond, the answer is finally “yes!” The definition of “qualified higher education expenses” has been expanded to include: expenses for the purchase of any computer and any related peripheral equipment, computer software, or Internet access and related services. The caveat for these items to qualify is that they must be used primarily by the beneficiary during any of the years they are enrolled at a qualified education institution.
As always, it is important to keep receipts and other documentation for your qualified expenses with the applicable year’s tax return.
Q: Do I have to include refunds in my gross income?
A: Refunds for qualified higher education expenses from an eligible education institution do not have to be included in gross income if they are recontributed back into the related 529 account within 60 days after the date of the refund. If the refund is not recontributed, you may have to include a portion or the entire amount as taxable income.
Q: How are earnings calculated for non-qualified distributions from multiple accounts?
A: The final change affects how earnings are computed when there are multiple accounts with the same account owner and the same beneficiary. Prior to the law change, these accounts were aggregated for tax reporting purposes. The change to allow the accounts to be individually reported will impact how the earnings portion of a non-qualified withdrawal will be calculated. For calendar year 2015, if you made a non-qualified withdrawal from one of these types of accounts, the Treasury Department and the IRS are providing transition relief, and you may need to request a corrected 2015 Form 1099-Q from CollegeCounts.
As always, we strongly encourage you to work with you advisor and tax professional to determine how these changes may affect you. You can also visit the Alabama CollegeCounts 529 Tax Center for the most up-to-date information as well as a list of the most frequently asked tax questions.
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