Are 529 Plan Earnings Subject to Kiddie Tax?

Technical topics regarding tax preparation.
#1
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So grandparent opened 529 plan for grandchild. Grandchild is now attending a private Christian college that is not a qualified education institution and does not issue Form 1098T's. It appears the income is subject to tax and the 10 percent penalty, but what about the kiddie tax? Anyone run into this before?
 

#2
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Kiddie Tax Form 8615 instructions, “unearned income” includes all taxable income other than earned income" (see below).

So if 529 income taxable then would fit under definition of unearned income, therefore could be subject to NIIT if meets all other NIIT conditions.

IRC 911(d)(2)Earned Income
911(d)(2)(A)In General
The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
 

#3
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Thanks for the reply Taxmaster. My thought was that it is subject to the kiddie tax, but when my software did not give me a diagnostic for it, I started looking into it. I have found several articles which seem to state otherwise:
https://www.aaepa.com/2021/10/the-kiddi ... ilds-game/

My only thought is that these articles are stating that the 529 accounts are not subject to the kiddie tax if used for qualified education expenses. However, none of them state that, so I'm wondering if I am missing something.
 

#4
Nilodop  
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My only thought is that these articles are stating that the 529 accounts are not subject to the kiddie tax if used for qualified education expenses. However, none of them state that, so I'm wondering if I am missing something.. That is indeed what they are saying. And there are articles that are more specific and complete. Here's one. https://www.savingforcollege.com/articl ... kiddie-tax.
Are 529 plan earnings subject to the Kiddie Tax?
Interest earned on 529 plans and custodial 529 plan accounts is not subject to the Kiddie Tax. 529 plans are investment accounts designed to help individuals save for college. Contributions are made with after-tax dollars, and any interest earned on the investment grows tax-deferred. Distributions are completely tax-free when the funds are used to pay for qualified higher education expenses.
 

#5
sjrcpa  
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But OP is saying the distributions were not used for qualified higher education expenses.
 

#6
Nilodop  
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Right, which is why I posted as I did to explain why the distributions are subject to the kiddie tax.
 

#7
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Nilodop wrote:My only thought is that these articles are stating that the 529 accounts are not subject to the kiddie tax if used for qualified education expenses. However, none of them state that, so I'm wondering if I am missing something.. That is indeed what they are saying. And there are articles that are more specific and complete. Here's one. https://www.savingforcollege.com/articl ... kiddie-tax.
Are 529 plan earnings subject to the Kiddie Tax?
Interest earned on 529 plans and custodial 529 plan accounts is not subject to the Kiddie Tax. 529 plans are investment accounts designed to help individuals save for college. Contributions are made with after-tax dollars, and any interest earned on the investment grows tax-deferred. Distributions are completely tax-free when the funds are used to pay for qualified higher education expenses.


Yes, I saw that article also Nilodop, thanks. However, to me, this article is not clear either. It makes it sound to me as if all distributions from 529 plans are not subject to kiddie tax, and any distributions used for qualified education expenses are not taxed at all.

I think all of these articles are just poorly written.
 

#8
Nilodop  
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Seems clear to me. Rare for such an article to get into every possible factual situation. Anyway, section 529 itself seems clear.
 


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