Student Loans | Can College Savings Money Be Used To Repay Student Loans?

March 1, 2012 – 9:01 am

* Withdrawals to repay student loans aren’t automatically tax-free.

Q. My question is on our Section 529 tuition savings plan. My son will be graduating soon from a four-year college. He received scholarships and has federal loans, both subsidized and unsubsidized.

We have no other children to transfer the saved Section 529 money to. When he graduates, can I pay his federal loans with the 529 funds without a penalty? Also, is there a limit per year that I can take from the 529 to pay these loans?

Education-related expenses that qualify for tax-free withdrawal from Section 529 plans include college tuition, lab fees, books and supplies, a computer and even room and board while attending college. However, the IRS does not recognize college loan repayment as a qualified educational expense.

To take a tax-free withdrawal from a 529 plan, you must either use the money directly to pay for a qualified higher educational expense or repay the loan in the year in which you took it out. Otherwise, you will not receive the tax break on the withdrawal, and you could be liable for an additional penalty of 10 percent of the withdrawal that is attributed to the loan repayment.

” Michael Gutwetter is a certified public accountant in Saddle Brook.

Q. We own a beach house in Brigantine. Besides paying real estate taxes, we receive bills from the city for water and sewage. I asked the Brigantine tax office if I could deduct the water and sewage bills as I deduct my real estate tax on my tax returns, and was told no.

If I use the house for business or rent it out, however, I will be allowed to deduct these payments. It seems unfair.

When you file your U.S. individual tax return, you can deduct real estate taxes. Under tax law, real estate taxes must be for the welfare of the general public and not just for services to you.

It appears that at your beach house, the sewage system is a special privilege granted to the homeowners and not to general public welfare. In view of this, it is billed separately from your real estate taxes, and is not deductible.



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