Distributions from 529 accounts are not subject to federal income taxes as long as the money is used for qualified educational expenses. If the distribution is not used for qualified educational expenses, any earnings on the distribution may be subject to income taxes and a 10% federal penalty tax.
The direct debit feature may be used only for 529 distributions to qualified educational institutions in the United States to pay for qualified educational expenses as defined by Internal Revenue Code Section 529 and that the feature may not be used for any other 529 distribution purpose. 529 account direct debit payments will be reported as a beneficiary distribution, and IRS Form 1099-Q will be issued to the designated beneficiary of the 529 account.
For more information, please consult with a tax professional.