What is a “Qualified Expense”?

Most of us will be lucky to save enough in 529 plans to cover the cost of college tuition, let alone room, board and/or any of the other expenses that might qualify. Here is a quick rundown of what expenses qualify with a 529 savings plan:

• Room and board: This is easy to figure out if your student lives on campus. Off campus is actually pretty straightforward too. Generally, you can’t claim more than the cost of living on campus, or an “estimated off-campus amount” that the school publishes. If you spend more than that amount, it’s not qualified so you can’t use your 529 plan funds to pay for it.

• Computers and Internet access: It used to be that computers were only covered if your school specifically required one. Now you can use your 529 funds to pay for a computer, Internet access and relevant software regardless of school.

• Just because you need it, doesn’t make it a cost of attending school. Toiletries, extra-long sheets, and transportation to and from school all fall under the “not qualified” heading. Nor are loan repayments, fraternity or sorority dues, or tickets to sports events.

There are some gray areas too. Is your student’s on-campus health insurance part of the fees, or are they required to purchase it separately? If it’s a cost of attending, then it could be a qualified expense.

The above applies to 529 savings plans. If you have a prepaid plan (which are only offered by a limited number of states; Oregon is not one of them), then the list of qualified expenses is quite a bit shorter. Generally these are limited to tuition and mandatory fees and exclude room, board and books.

The American Opportunity Tax Credit and Lifetime Learning Credit each have different definitions of qualified expenses too. Assuming that you’ll pay some of your expenses with 529 funds and you may be eligible for the AOTC or LLC, it’s important to know which expenses are eligible for which so that you can coordinate your claims because you can’t take either of the credits for an expense that was paid by your 529 plan funds.