Virginia 529 Plans

[Christian]

Two of my clients have cashed out the remnants of a 529 plan which was established to pay for their child's college expenses. The child is no longer their dependent and they had the remaining balance distributed to themselves under their social security number. The form shows a basis number and an earnings number. I have oddly enough never had this to come up and most 529 plans are exhausted paying college tuition expenses. I would think the earnings amount should be added to their gross income but am not certain on this point therein lies the reason for my post. 

[Lee B]

"If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings." 

[Christian]

You are saying the total distribution of basis and earnings are subject to tax ? In Virginia contributions to 529 plans are exempt from state tax which will now be paid on the distribution but the basis was created from money originally taxed by the IRS. Isn't this taxing the same money twice?

[Lee B]

23 hours ago, cbslee said:

"If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings." 

". . . . .on the earnings"

[Christian]

In the words of an elementary school classmate who was sitting at a piano recital in front of an audience with his mother beaming with pride. "It appears I have forgotten" meaning the piece he was supposed to play. He was summarily snatched up by his mother and quickly removed from the hall.