Use of Funds

IRS Publication 970 defines qualified education expenses as follows: These are expenses related to enrollment or attendance at an eligible educational institution. As shown in the following list, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time to be qualified.

1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible educational institution.
   1. Tuition and fees.
   2. Books, supplies, and equipment.
2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution.
3. Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
   1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
   2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

   You may need to contact the eligible educational institution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominately educational in nature.)

Certain sections of the Alabama income tax statute refer to definitions in Code Section 529, as amended, including the definition of “Qualified Higher Education Expenses.”  For years after 2017, amendments to Code Section 529 treat withdrawals for tuition in connection with enrollment or attendance at an elementary or secondary school, whether public, private or religious, with a limit of $10,000 per year, per child collectively from all 529 plans to be “Qualified Higher Education Expenses.”  Consequently, a Designated Beneficiary may be able to use the amounts in a Plan Account to pay for K-12 Tuition Expenses (as defined in the Program Disclosure Statement) without incurring adverse tax consequences. However, the Act (which has not been amended since adoption of the Code Section 529 amendments referred to above) only covers expenses at “eligible educational institutions.” The definition of this term in Code Section 529 does not appear to cover K-12 schools, although Internal Revenue Service Publication 970 provides that an “eligible educational institution” “can be either an eligible postsecondary school or, for amounts paid from distributions made after December 31, 2017, an eligible elementary or secondary school.” Publication 970 does not have the same authority as Code Section 529.

The Program recommends that taxpayers seek tax advice from an independent tax advisor with respect to their ability to use the Program to pay K-12 Tuition Expenses without incurring adverse tax consequences.

Federal Law Change (December 20, 2019). The Federal Consolidated Appropriations Act (2020) was signed into law by the President. It includes several new provisions related to 529 college savings accounts, effective for distributions made after December 31, 2018:

DISTRIBUTIONS FOR CERTAIN EXPENSES ASSOCIATED WITH REGISTERED APPRENTICESHIP PROGRAMS. Qualified higher education expenses shall include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).

DISTRIBUTIONS FOR QUALIFIED EDUCATION LOAN REPAYMENTS. Qualified higher education expenses shall include amounts paid as principal or interest on any qualified education loan (as defined in section 221(d) of the Internal Revenue Code) of the designated beneficiary or a sibling (as defined in section 152(d)(2)(B) of the Internal Revenue Code) of the designated beneficiary. The amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000 (reduced by the amount of distributions so treated for all prior taxable years).

Please consult with your financial, tax and other advisor to learn more about how the federal law changes and state-based benefits (including any limitations) would apply to your specific circumstances.

Funds can be used at any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs. Check out a listing of eligible schools from the Department of Education.

If you receive a refund from an Eligible Educational Institution for Qualified Higher Education Expenses that were paid from money withdrawn from your Account, you can:

• Pay for Other Qualified Higher Education Expenses – you can use the funds to pay other Qualified Higher Education Expenses incurred by that Beneficiary in the same calendar year.
• Recontribute Refunded Amounts to a 529 Account – if a student receives a refund of Qualified Higher Education Expenses that were treated as paid by a 529 distribution, the student can recontribute these amounts into any 529 account for which they are the beneficiary within 60 days after the date of the refund.  The amount recontributed cannot exceed the amount of the refund.
  • EXTENSION OF TIME – for refunds made on or after February 1, 2020 and prior to May 16, 2020 the IRS has extended the time to recontribute funds to the greater of 60 days or July 15, 2020.

You should consult with your financial, tax or other advisor regarding your individual situation.

Money from a CollegeCounts account can be paid directly to the account owner, directly to the beneficiary, to the account owner’s bank account, or to an eligible educational institution.

Payments to Account Owners, Beneficiaries, and Bank Accounts
An account owner or custodian (under a state UGMA/UTMA) may request a withdrawal online or by downloading and submitting the Withdrawal Request Form.

Plan Ahead When Requesting a Withdrawal
Generally, if a request is received in good order on a business day prior to the close of the markets (typically 3 p.m., central time), the investments will be sold at that day’s closing prices, and a check will be mailed the following business day. Please plan ahead and allow sufficient mail time. For withdrawals payable to the account owner’s bank account, please allow several business days for your bank to process the payment and credit your account.

The tax benefits afforded to 529 plans must be coordinated with other programs designed to provide tax benefits for meeting higher education expenses in order to avoid the duplication of such ben­efits. You should consult with a qualified tax advisor with respect to the various education benefits.

Taxable Portion of a Distribution
The part of a distribution representing the amount paid or contrib­uted to a qualified tuition program doesn’t have to be included as income. This is a return of the investment in the plan. The desig­nated beneficiary generally doesn’t have to include as income any earnings distributed from a qualified tuition program if the total distribution is less than or equal to adjusted qualified education expenses. To determine if your total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all qualified tuition program distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses are the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes: the tax-free portion of scholarships and fellowship grants; veterans’ educational assistance; the tax-free portion of Pell grants; employer-provided educational assistance; and any other tax-free payments (other than gifts or inheritances) received as educational assistance.

Coordination With American Opportunity and Lifetime Learning Credits
An American Opportunity or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribu­tion from a qualified tuition program, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses using tax-free educational assis­tance, he or she must further reduce them by the expenses taken into account in determining the credit.

Coordination With Coverdell Education Savings Account Distributions
If a designated beneficiary receives distributions from both a quali­fied tuition program and a Coverdell Education Savings Account in the same year, and the total of these distributions are more than the beneficiary’s adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.

Coordination With Tuition and Fees Deduction
A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a qualified tuition program as long as the same expenses aren’t used for both benefits.