I recently received the following question:
I heard you could reimburse yourself for the entire amount of Room and Board even if you did not spend that much. Is that allowed?
Every school sets a budget or allowance for room and board, referred to as the cost of attendance. This budget costs can include rent, utilities, and food. All off-campus housing expenses that fall within the budget qualify for 529 reimbursement. You can read this article for how to look up your cost of attendance numbers for domestic schools and this one for foreign schools.
When you are living on campus, your qualified expenses are very clear. Student housing has a clear bill where utilities are included. Your university meal plan has a clear bill. You add the two together and reimburse yourself that full amount. You don’t even need to look up the cost of attendance numbers because the actual room and board amount charged to a student by the school itself is a qualified expense.
However, when you are living off campus, the issue becomes admittedly unclear.
Here is what the IRS Publication 970 says (PDF Page 41):
Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).
The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.
a.The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b.The actual amount charged if the student is residing in housing owned or operated by the school.
You may need to contact the eligible educational institution for qualified room and board costs.
Again, because “The actual amount charged if the student is residing in housing owned or operated by the school.” is one of the options, this means that on campus students can simply reimburse themselves for their housing and meal plan costs without regard to cost of attendance estimates.
However, the other limit listed here is the one for off-campus individuals. So rephrasing this sentence to clarify for off-campus individuals, the IRS is saying:
The expense for room and board qualifies only to the extent that it isn’t more than the allowance for room and board in the cost of attendance for a particular academic period.
The clear part of this rule is that, if you add up all your room and board expenses and they add up to more than the cost of attendance budget, then you obviously cannot reimburse yourself for your full costs. Instead, you must reimburse only the cost of attendance limit.
UVA’s cost of attendance for 2019-2020 lists Housing as $6,720 and Dining as $5,230. This is a total budget of $11,950 for the school year.
If you spent $12,000 actual for the 2019-2020 school year, then the IRS is clear, you can only reimburse the $11,950 budget.
However, imagine that your expenses for the year were $1,200 for utilities, $2,400 for rent, and $6,000 for food. That is a total of $9,600 for the school year.
First, a side note: The total number is the only important one. You’ll notice in this example, that Housing adds up to $3,600, less than the Housing estimate, and Dining as $6,000, more than the estimate. However the total for the school year, $9,600, is less than the $11,950 budget. Because the total for the school year is less than the allowance for room and board for the academic period, we know that at least $9,600 can be reimbursed.
Now the question at hand is, can you reimburse yourself for the entire amount of Room and Board even if you did not spend that much?
The uncertainty comes from the fact that these two ideas are logically consistent together: “You cannot reimburse more than the allowance for room and board regardless of your expenses. You can reimburse exactly the allowance for room and board regardless of your expenses.” and these two ideas are logically consistent together: “You can only reimburse exactly what you spent, but you cannot reimburse more than the allowance for room and board regardless of your expenses.”
In Publication 970, the IRS only says that you cannot reimburse more than the allowance for room and board even if your actual expenses are higher. However, they are silent on whether you can reimburse yourself for the room and board allowance if your expenses are lower or if you have to reimburse yourself for your expenses only.
To find the answer, I go to the tax law that inspired the publication. Here is IRC Section 529 which states in (3)(B)(ii):
The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed—
(I) the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or
(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.
See how here it says, “the amount treated as qualified higher education expenses.” This means that it is not the cost of attendance numbers which are the qualified expense but rather you had an expense and the cost of living numbers are used to determine what amount of that expense is qualified.
For this reason, I would suggest that if you know that you spent less than the room and board allowance, then you should only reimburse yourself what you know that you spent.
Now, many families have the problem that they aren’t quite sure what was spent.
To reimburse from a 529, you need evidence of every qualified purchase. That means saving receipts, bank statements, credit card statements, or “contemporaneous records” (like a piece of paper with “March 3, 2019; $8 at Chipotle” written on it) to prove your total expenses. This is not always an easy task.
I remember my second year of college (first year off campus), I saved all my food receipts in an envelope to provide to my 529 account owner to request reimbursement. At Thanksgiving, I came home with my envelope to give to my grandfather to find out that the ink had faded off of several of my receipts rendering them largely illegible. I had to fall back on my bank statements to estimate what my first quarter of food costs were. My cash purchases were either lost or estimated.
Even with this difficulty, the fact (or at least a conservative interpretation) is that you can only reimburse what you actually spent.
Many people have anecdotal stories of being audited, and they that the IRS ended up being okay with their reimbursement of the full allowance even though they didn’t have the evidence to prove they had expenses for that full amount. However, these stories are like dodging a train. Don’t jump on the tracks just because some trains are slower than others.
So, can I reimburse more than my actual room and board expenses from my 529 plan? No, you can only reimburse actual expenses up to the cost of attendance room and board budget.
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