Make sure you keep receipts and invoices for any qualified college expenses in your tax files. CollegeCounts does not require any proof of your withdrawals, but you will want to have documentation of your expenses in the event the IRS has questions. We also recommend that you match any withdrawals from your CollegeCounts 529 account in the same calendar year as you pay the actual qualified college expense.
Checks can be made payable to either the Account Owner, Beneficiary, or School. Keep in mind that the recipient of the withdrawal will receive the 1099-Q tax reporting form regarding the withdrawal. The Account Owner will receive the 1099-Q for any withdrawals payable to them. The Beneficiary will receive the 1099-Q for any withdrawals payable to the Beneficiary or the School. As you plan to take withdrawals, keep in mind any potential tax consequences when determining how you would like the check issued.
PLEASE NOTE: The earnings portion of a non-qualified withdrawal is subject to federal income tax and 10% federal penalty tax. In addition, Alabama provides in the event of a non-qualified withdrawal an amount that must be added back to the income of the contributing taxpayer. The amount to be added back will be the amount of the non-qualified withdrawal plus 10% of the amount withdrawn (click here for additional information).
Make sure to consult with your tax professional regarding the best strategy when withdrawing funds. Your 529 withdrawals can be tax-free, but you should consider the various federal and state tax credits and deductions available as well. Typically you can use qualified college expenses for one tax credit, deduction, or tax-free 529 treatment. Generally you cannot “double dip” and use the same expenses for multiple tax credits, deductions, and tax-free withdrawal treatments from your 529. CONSULT your tax advisor for more information or advice.