529 plans can be used to pay for rent for students who do not live on campus, as long as the student is enrolled at least half-time and is seeking a degree, certificate or other recognized credential. Qualified room and board expenses for an off-campus student are limited to the allowance reported by the college in its “cost of attendance” figures.
Special needs equipment refers to equipment that is necessary for a student with special needs to enroll at a college or university. Families with special needs may also consider using a 529 ABLE account to save for college and other education expenses.
Transportation and travel costs are included in a college’s official cost of attendance, but they are generally not considered qualified 529 plan expenses.
Health insurance and transportation costs are only considered qualified expenses if the college charges them as part of a comprehensive tuition fee, or the fee is identified as a fee that is “required for enrollment or attendance” at the college.
Costs incurred prior to the student’s admission to a college or university, such as college application and testing fees, are also not considered qualified expenses. Although these costs are required for admission, they are not required for enrollment or attendance.
Parents who use 529 plans to pay for college may be eligible for additional tax savings with the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit (LLTC). However, these federal education tax credits are only available for families who meet certain income requirements, and there is no double-dipping with 529 plan tax benefits.
The maximum amount that can be withdrawn tax-free from a 529 plan will be the total amount of higher education expenses paid during the year, minus any amount used to generate the AOTC or LLTC. For example, parents would subtract $4,000 from total qualified education expenses if they are claiming the maximum $2,500 AOTC credit. An accountant or tax advisor may be able to provide more guidance on your specific situation.