ExpertMedium1 markMultiple Choice
CPA · Question 56 · Area I: Individual Compliance and Planning
A taxpayer contributes $5,000 to a 529 Qualified Tuition Program in Year 1. In Year 5, the account is worth $8,000. The taxpayer withdraws the full $8,000 and uses it for a family vacation (non-qualified expense). The taxpayer's marginal rate is 22%. What is the tax liability/penalty?
A taxpayer contributes $5,000 to a 529 Qualified Tuition Program in Year 1. In Year 5, the account is worth $8,000. The taxpayer withdraws the full $8,000 and uses it for a family vacation (non-qualified expense). The taxpayer's marginal rate is 22%. What is the tax liability/penalty?
Answer options:
A.
$0
B.
$660 Tax
C.
$660 Tax + $300 Penalty
D.
$1,760 Tax + $800 Penalty
How to approach this question
Non-qualified 529 withdrawal: 1. Identify Earnings portion ($8k - $5k = $3k). 2. Calculate Tax on Earnings ($3k * 22%). 3. Calculate 10% Penalty on Earnings ($3k * 10%). Principal is tax-free.
Full Answer
C.$660 Tax + $300 Penalty✓ Correct
C
IRC §529. The principal ($5,000) is returned tax-free. The earnings ($3,000) are subject to ordinary income tax ($660) and a 10% penalty ($300).
Common mistakes
Taxing the full withdrawal; forgetting the 10% penalty.
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