Plus, room and board rules and a living trust question.
College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to firstname.lastname@example.org.
Question: Is an automobile for a student a qualified higher education expense?
Susan: No, or at least probably not. Qualified higher education expenses are "(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and (ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance." Code § 529(e)(3)(A); Prop. Treas. Reg. § 1.529-1(c).
First, the enumerated expenses do not explicitly include transportation. In contrast, under Code section 530(b)(4), which is applicable to Coverdell Education Savings Accounts, "transportation" is explicitly enumerated as a "qualified elementary and secondary education expense."
If an expenditure is required by the school's catalogue or included in the school's "cost of attendance" for financial aid purposes, it should be a qualified higher education expense. Arguably, expenditures not explicitly included in the cost of attendance should be qualified expenses if they are ordinary and reasonably necessary. However, the Tax Court has taken a very narrow view of what constitutes supplies and equipment required for enrollment or attendance. In Gorski v. Commissioner, T.C. Summary Opinion 2005-112 (August 4, 2005), the Tax Court ruled that the purchase of a computer for a college student was not a qualified higher education expense under section 529(e)(3)(A) of the Code. The case did not involve a 529 savings account but rather involved the issue of whether the 10% additional tax should be imposed on an IRA withdrawal to the extent it was used to purchase the computer. Early IRA withdrawals are not subject to the 10% additional tax if they are used for qualified higher education expenses as defined in section 529 of the Code. The Tax Court reasoned that the Code section provides that the supplies or equipment be "required" by the school for attendance. The court concluded that because the university being attended by the child did not require that a student own a computer, it was not a qualified higher education expense. The court was not moved by the petitioner's argument that the university only had a limited number of computers available for student use and that his daughter would have to walk back and forth from the library to her dorm room late at night in order to use the school's computers. Nor was the Tax Court moved by the argument that the professors used an Internet based system to post syllabi and course assignments and that certain university information is available only over the Internet.
Thus the Tax Court is likely to take a similarly dim view of the purchase of a car, especially in light of the fact that a car would likely also be used for noneducational purposes and would likely retain value after the completion of education.
Question: Do qualified higher education expenses include room and board?
Susan: Yes, with limits. Code section 529(e)(3) provides with respect to "qualified higher education expenses":