Question 1

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?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Taxing the full withdrawal; forgetting the 10% 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?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

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