If you take money out of a 529 and use for nonqualified expenses and purposes, you may owe more as it concerns your Federal tax liability.
A 529 plan is oftentimes used by parents, grandparents, etc. in order to help a beneficiary, such as a child, grandchild, niece, nephew, or even for themselves. The money contributed to these plans grows and can be withdrawn tax-free, provided it is used for qualified higher education expenses (QHEE). These expenses can include tuition and fees, certain electronics, books and classroom equipment, and some room and board costs. You can find more on QHEE here: Topic No. 313 Qualified Tuition Programs (QTPs)
However, there are times when 529 funds may be used for nonqualified expenses and/or when funds are used for an amount which exceeds the qualified higher education expenses amount, of which the earnings on these distributions are, therefore, subject to additional taxation as outlined by the IRS.
In order to model the taxable portion of the distribution from a 529 plan, you will want to utilize the "Other Income" worksheet within the Income header of Scenario Analysis for the withdrawal amount from the 529 plan, as shown below:
Additionally, if any or all of the distribution will be subject to the 10% penalty, you will want to also be mindful of this penalty amount associated with the respective withdrawal from the account and input that within the "Other Taxes" worksheet within the Other Taxes header of Scenario Analysis, as shown below:
Caution: The software will NOT calculate the penalty amount for you. This will need to be done outside the software.