Taxpayer's daughter is 19 in 2021 and started college in the fall and paid additional for "tuition insurance" through a third party insurance company (see link below). After paying for the full semester, they withdrew funds from her 529 to cover the expenses. I'm not sure at this time what these numbers are, but for arguments sake let's say it was $10,000 for tuition, $5,000 for room and board, and $129 for the insurance. They then withdrew $15,000 from the 529 to cover costs 100% before 12/32/21.
Sometime in 2021 the daughter withdrew from school under a medical exemption and filed a claim with the insurance company. They received a $10,000 insurance payout directly from the insurance and nothing from the school. This payout was dated 1-14-22 and obviously received in 2022.
I'm wondering how this will all play out over the course of these two years? Since the payout didn't come until 2022 my guess is that it wouldn't affect the 2021 tax returns at all. Although I suppose there could be the position that the insurance claim had been filed in 2021 and the payout was expected. But either way...should this affect the education expenses paid in 2021 at all as it is an insurance payout?
Never heard of this before and it appears to be pretty new. I've been trying to compare this situation to other types of insurance claims (life, personal auto, rental real estate, casualty loss, etc.) and just can't seem to come to a conclusion as to how this may affect one's taxes:
Taxable in the year received if a deduction was allowed in the prior year?
Not taxable in the year received but reduce the amount of AQEE for the 529 distribution?
Not taxable in the year received because it is insurance and the premium was not deducted anywhere?
Possibly a "refund" of prior year 529 expenses allowed to be returned to the 529?
https://www.rewardexpert.com/blog/allianz-tuition-insurance-helping-families-protect-their-higher-education-investment/