Laura Corin Posted September 8, 2014 Share Posted September 8, 2014 Calvin will be turning 18 in December and is a US citizen. At university he will be living on disbursements from a 529 fund, and also UK government loans. From my Googling, it looks as if he doesn't have to file a US tax return until he works and earns around USD6,000 in one tax year. Is that your understanding? Many thanks L Quote Link to comment Share on other sites More sharing options...
Starr Posted September 8, 2014 Share Posted September 8, 2014 I just read that money from a 529 fund is considered income. It was just a finance blog for college students so not official. My US friends in Canada find taxes to be a pain. Good luck sorting this out. My dc start filing once they have documented income even if it's too low for taxes to be taken out. Quote Link to comment Share on other sites More sharing options...
Laura Corin Posted September 8, 2014 Author Share Posted September 8, 2014 I just read that money from a 529 fund is considered income. It was just a finance blog for college students so not official. My US friends in Canada find taxes to be a pain. Good luck sorting this out. My dc start filing once they have documented income even if it's too low for taxes to be taken out. Ah. Okay - I'll look into the 529 question. Yes, it's a big mess: Husband has to file in the UK and the US, and each country's tax year runs from and to different dates. It's not pretty. L Quote Link to comment Share on other sites More sharing options...
Momling Posted September 8, 2014 Share Posted September 8, 2014 When I was a student (in the us and overseas) and when I worked (in the us and overseas) earning close to nothing, I did not file. If he were my child, I wouldn't bother. Quote Link to comment Share on other sites More sharing options...
FaithManor Posted September 8, 2014 Share Posted September 8, 2014 I have no advice but the whole concept of a 529 being "income" and taxable makes my head hurt. Seriously, the American tax code seems to be explicitly designed to make sure middle class kids can't get ahead. Middle class - no financial aid. Parents save for your education knowing this, and then find out that if there is a withdrawal of more than $14,000 in any school year, there will be gift tax on the amount above that. Tuition, room, and board is $30,000.00 plus at a huge number of institutions. Only a small percentage of students able to commute to a low priced regional university will be able to stay under that amount. That's insane! Is Calvin considering UK citizenship? Given the way things are going in this country, it's getting harder and harder to believe that he would benefit from remaining an American citizen. Sigh.... Quote Link to comment Share on other sites More sharing options...
Laura Corin Posted September 8, 2014 Author Share Posted September 8, 2014 I have no advice but the whole concept of a 529 being "income" and taxable makes my head hurt. Seriously, the American tax code seems to be explicitly designed to make sure middle class kids can't get ahead. Middle class - no financial aid. Parents save for your education knowing this, and then find out that if there is a withdrawal of more than $14,000 in any school year, there will be gift tax on the amount above that. Tuition, room, and board is $30,000.00 plus at a huge number of institutions. Only a small percentage of students able to commute to a low priced regional university will be able to stay under that amount. That's insane! Is Calvin considering UK citizenship? Given the way things are going in this country, it's getting harder and harder to believe that he would benefit from remaining and American citizen. Sigh.... He's a dual citizen already; he also has the right to live in Hong Kong. Up to now we have been able to play the system a bit: using US-based tax-efficient savings vehicles to save, then send him to a cheaper UK institution (because he is a legal resident here). I'm having a hard time tracking down information on treatment of the 529, beyond the standard 'if it's allowable expenses, then any capital gain is not taxable'. Do you have any good sources for the gift tax issue and any income tax issues for the student? FWIW - it's not easy to renounce US citizenship, not that the boys want to do it at present. It triggers an automatic IRS investigation, because the assumption is that taxes are the only reason someone might want to give it up.... L Quote Link to comment Share on other sites More sharing options...
saw Posted September 8, 2014 Share Posted September 8, 2014 I don't know the answer, but the US Embassy in London has an IRS office in the building and they're pretty helpful. I've gone to them in person but they also have a phone help line. They were helpful to me on a couple of occasions and might, given their location, have some expertise in the whole dual thing. The US-based IRS obviously also has a phone line but I wouldn't recommend trying them. Quote Link to comment Share on other sites More sharing options...
Laura Corin Posted September 8, 2014 Author Share Posted September 8, 2014 I don't know the answer, but the US Embassy in London has an IRS office in the building and they're pretty helpful. I've gone to them in person but they also have a phone help line. They were helpful to me on a couple of occasions and might, given their location, have some expertise in the whole dual thing. The US-based IRS obviously also has a phone line but I wouldn't recommend trying them. Thanks - I'll give them a call. L Quote Link to comment Share on other sites More sharing options...
klmama Posted September 8, 2014 Share Posted September 8, 2014 Please do contact the IRS for info, and please let us know what you find out. I thought that that 529 disbursements were considered untaxable income, but that that "income" would affect financial aid via the FAFSA process. Quote Link to comment Share on other sites More sharing options...
shage Posted September 8, 2014 Share Posted September 8, 2014 My copy and paste is not working correctly at the moment, but if you go to the IRS website and search for 529 you should find the official answer. My understanding is that the distribution is NOT taxed provided it is a qualified expense (tuition, books, room/board). The federal rules seems very clear cut. However, there are some states that might have a different interpretation. I am guessing you don't pay state tax? I would print out the copy of the IRS webpage or document though and stick it in a file with the disbursement documents to have handy in case he is ever audited. IOW, start building a file to make it easier should he ever decide to renounce. Quote Link to comment Share on other sites More sharing options...
shage Posted September 8, 2014 Share Posted September 8, 2014 Please do contact the IRS for info, and please let us know what you find out. I thought that that 529 disbursements were considered untaxable income, but that that "income" would affect financial aid via the FAFSA process. Yes, this. There really is no financial incentive for the 529 savings without the tax-free distribution. Quote Link to comment Share on other sites More sharing options...
Laura Corin Posted September 8, 2014 Author Share Posted September 8, 2014 Okay - from the IRS introduction: http://www.irs.gov/pub/irs-pdf/p970.pdf Page 57 (can't cut and paste) it says that the beneficiary does not usually have to pay taxes on the distribution from a 529, if it is for qualified expenses. So now I just need to check with the embassy about when Calvin needs to file an income tax return, assuming just low vacation-time earnings. ETA: on the embassy website - it seems that Calvin needs to have taxable income of at least US$10,000 before he needs to file. L Quote Link to comment Share on other sites More sharing options...
shage Posted September 8, 2014 Share Posted September 8, 2014 Okay - from the IRS introduction: http://www.irs.gov/pub/irs-pdf/p970.pdf Page 57 (can't cut and paste) it says that the beneficiary does not usually have to pay taxes on the distribution from a 529, if it is for qualified expenses. So now I just need to check with the embassy about when Calvin needs to file an income tax return, assuming just low vacation-time earnings. ETA: on the embassy website - it seems that Calvin needs to have taxable income of at least US$10,000 before he needs to file. L Oh good. I am pretty sure klmama is correct that the 529 distribution can impact the FAFSA numbers. That is because FAFSA is a weird alternate universe with limited basis in reality. It has nothing to do with the tax code. Stick with what the IRS and the embassy say, and ignore FAFSA if it doesn't apply. Quote Link to comment Share on other sites More sharing options...
JumpyTheFrog Posted September 8, 2014 Share Posted September 8, 2014 Taxes are paid on any distributions not used for qualifying expenses. I'm pretty sure the gift tax, if it applies, is on annual contributions, not withdrawals. Quote Link to comment Share on other sites More sharing options...
FaithManor Posted September 8, 2014 Share Posted September 8, 2014 Oh good. I am pretty sure klmama is correct that the 529 distribution can impact the FAFSA numbers. That is because FAFSA is a weird alternate universe with limited basis in reality. It has nothing to do with the tax code. Stick with what the IRS and the embassy say, and ignore FAFSA if it doesn't apply. This is so very true! Filling out FASFA is like engering the Twilight Zone! Quote Link to comment Share on other sites More sharing options...
Laura Corin Posted September 8, 2014 Author Share Posted September 8, 2014 This is so very true! Filling out FASFA is like engering the Twilight Zone! Luckily we didn't have to deal with that. We just had to state to the Scottish authorities that our income was over x amount, then Calvin was offered zero interest loans that cover his fees and (a good proportion of) his living expenses. The 529 will pick up the slack. If our income had been lower, then the loan would have been up to 100% of his needs. L Quote Link to comment Share on other sites More sharing options...
raptor_dad Posted September 8, 2014 Share Posted September 8, 2014 From my Googling, it looks as if he doesn't have to file a US tax return until he works and earns around USD6,000 in one tax year. Is that your understanding? Many thanks L I have no idea on the 529s... my understanding was that they were viewed as parent assets and not taxed like IRAs but I really have no idea. However, for earned income, he should have the same US tax exemption for the first $80k like anyone else(the UK may tax and that generates a US credit but the US doesn't care). In the US he may want/need to file but shouldn't owe any tax. In the UK he may need to file on earned income and 529 money may be taxable, but probably not, depending on the US/UK tax treaty. PS. I wish I could offer more specific advice. I am more familiar with Canada where 529 money is tax exempt and earned income is taxed at local rates and as such generally exempt in the US. This confusing overhead of US policy on worldwide income is why so many expats are renouncing US citizenship. PPS. I know in the 90's in the US, I still had to file complicated returns on my full scholarship detailing what portions were fully exempt(tuition, some fees, board) and what portions(books, optional fees, summer grants, etc) were taxable. It was a PITA but I never ended up owing any taxes. Quote Link to comment Share on other sites More sharing options...
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