Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Your Childs Off-Campus Internet and Phone Bills
Transcript
- Lucas: Alright Luna, here's a scenario I hear from listeners all the time. Their kid is living off-campus, they've got a 529 plan, and they're paying for internet and a cell phone. And they wonder — can the 529 pay for that? Luna: I've wondered that myself. It feels like a gray area. Lucas: It used to be. But the IRS has actually clarified this. Starting with the Tax Cuts and Jobs Act of 2017, and then with more specific guidance in recent years, off-campus internet service and cell phone bills are now considered qualified higher education expenses — as long as they're incurred while the student is enrolled at least half-time. Luna: So the 529 can cover the monthly internet bill? Even if the apartment is off-campus? Lucas: Yes. The key phrase from the IRS is 'expenses for internet access or other electronic communications services needed for the student's education.' And they've explicitly said that includes cell phone plans. The logic is that students need connectivity to do coursework, attend virtual office hours, submit assignments, collaborate on group projects. Luna: That makes sense. But what about buying a new phone or a laptop? That's different, right? Lucas: Right. The 529 can pay for a laptop as a computer equipment expense — we covered that in episode 111. But for the internet and phone bill category, we're talking about the service, not the device. So your child's monthly Verizon or AT&T bill qualifies. The activation fee, the taxes, the data plan. But if they buy a new iPhone, that's a separate purchase. Luna: So what's the practical limit? Can you pay the entire cell phone bill for the academic year? Lucas: The IRS doesn't put a dollar cap on this category specifically. But it has to be a reasonable amount. If your child's cell phone bill is $80 a month and they're using it for school, that's fine. But if you try to expense a $400-a-month plan with international data and multiple lines, the IRS might question it. The general rule is: if the expense wouldn't exist without the student's enrollment, it's likely qualified. Luna: And you need to keep documentation, I assume. Receipts, bills, proof of enrollment. Lucas: Absolutely. You want to keep the monthly statements from the internet provider and the phone carrier, plus a copy of the student's class schedule or enrollment verification. If the IRS ever audits, you need to show that the student was enrolled at least half-time during the billing period. Luna: What about summer? Many students stay in their off-campus apartment over the summer and take summer classes. Does the 529 cover internet then too? Lucas: Yes, as long as they're enrolled at least half-time in a summer term. If they're not taking classes, then the internet bill wouldn't be a qualified expense. But if they're doing an internship for credit, that counts. Luna: So you could pay for internet and phone during the summer session. That's helpful. Lucas: Exactly. And here's a strategic angle: using 529 funds to pay these recurring bills frees up other cash for investing. Instead of paying the $120 monthly internet bill out of your after-tax income, you let the 529 cover it tax-free. Over four years, that's nearly $6,000 in qualified distributions. Luna: And if the student has a scholarship, you can withdraw an equal amount from the 529 without penalty, though you'll owe income tax on the earnings. But that's a different episode. Lucas: Right. We covered that in episode 120. Now, one thing to watch out for: coordination with the American Opportunity Tax Credit. If you're claiming the AOTC for tuition and fees, you can't also use 529 funds for those same expenses. But internet and phone are separate — they don't overlap with the AOTC. So you can get both benefits. Luna: That's a great point. So a family could pay tuition out of pocket to claim the AOTC, and use the 529 for internet and phone bills. Maximize the tax benefits. Lucas: Exactly. It's a classic stacking strategy. And I want to be clear — this applies to off-campus students, but also to students living at home with their parents. If your child is enrolled half-time and uses the home internet for coursework, you can allocate a portion of the household internet bill as a qualified expense. Luna: That's interesting. So if the family internet bill is $80 a month and the student uses it for school, you could have the 529 reimburse, say, $40 a month? Lucas: That's the idea. You need to be able to justify the allocation. The IRS hasn't issued specific guidance on how to split a shared bill, but a reasonable percentage based on usage or number of users should be defensible. I'd suggest documenting the allocation method in case of audit. Luna: Let's talk about a concrete example. Say the Smith family's daughter is a junior living off-campus. Her internet is $60 a month, her cell phone is $70. That's $130 a month, $1,560 for the academic year. They can take that out of the 529 completely tax-free. Lucas: Right. And over four years, that's over $6,000. Plus, if she's there for summer sessions, add another year. It really adds up. And the Smiths can invest the money they would have spent on those bills into a Roth IRA or a brokerage account. Luna: Speaking of making the most of your money, we hear from a lot of listeners who say these episodes have helped them save thousands in taxes. And honestly, the reason we can keep making these detailed, ad-free episodes is because of listeners like you. Lucas: Yeah, it's true. If you've ever found yourself saying 'I wish I'd known that years ago' after one of our episodes — that's what keeps us going. A couple of dollars a month is genuinely what keeps these shows running. You can support us at buy me a coffee dot com slash fexingo. Luna: And it makes a real difference. Every bit helps us dig into the specifics, like today's internet and phone rules, so you don't have to read the IRS publications yourself. Lucas: Alright, back to the strategy. One more thing: if you're using a 529 to pay for internet and phone, you need to make sure the distribution is properly coded. Most 529 plans will ask for a reason code when you request a withdrawal. You'd select 'room and board' or 'other qualified expenses' — depending on your plan. And keep those receipts. Luna: What about prepaid plans? Some families buy a year of internet service upfront. Does that still qualify? Lucas: The IRS says expenses must be paid during the academic period. So if you prepay for a year while the student is enrolled, that should be fine. But if you prepay before they're enrolled, it might not qualify. Better to pay month to month or semester-by-semester to be safe. Luna: And if the student graduates mid-year? The internet bill for the rest of the lease wouldn't be qualified. Lucas: Correct. Once they're no longer enrolled at least half-time, those expenses stop being qualified. You'd need to pay the remaining bills with non-529 money. Luna: So timing matters. What about deposits? Some apartments require a deposit for internet installation. Lucas: That's a gray area. The IRS hasn't explicitly addressed deposits. But since deposits are typically refundable, I'd avoid using 529 funds for them. Stick to the non-refundable service charges — monthly fees, activation fees, equipment rental fees for modems or routers. Luna: And if the student has a roommate and they split the internet bill? Can the 529 only cover the student's share? Lucas: Yes. You can only reimburse the student's portion. If the total bill is $80 and they split it equally, the qualified expense is $40. You'd need to have the student pay their share and then reimburse them from the 529, or have the bill in their name. Luna: That's a good practice anyway. Keep the bill in the student's name to make documentation cleaner. Lucas: Absolutely. Alright, let's wrap with the big takeaway: internet and cell phone bills are now clearly qualified 529 expenses for enrolled students. Use them, but keep good records. And if you're not sure about your specific situation, consult a tax advisor. Luna: And if you want to learn more about what else the 529 can cover, we have over a hundred episodes. Check out our library on the Fexingo Business network. Lucas: We'll see you next time. Until then, keep saving smart.