When we think of universities, the prevailing idea is how we deliver education. One solution we discuss with our clients is to donate funds to a qualified tuition program, better known as the 529 Plan. Generally, distributions and earnings from 529 plans are not taxable when used to pay certain eligible educational expenses. However, to minimize your tax impact and maximize your benefits, it’s important to understand the rules for eligible education expenses, as well as special rules for 529 plans.

What is a 529 plan?

The 529 plan is a savings plan maintained by the state and accredited agencies that allows donors to either prepay the beneficiary’s eligible post-secondary education costs or contribute to the plan for those costs. There are no income limits for contributors. However, donations must be no more than necessary to provide eligible educational expenses for the designated beneficiaries. People can make 529 plans for themselves or their spouses, children, grandchildren, nieces and nephews. In addition, 529 plans offer flexibility and allow persons in certain circumstances to change beneficiaries.

What expenses can 529 be used for?

The 529 Plan covers eligible beneficiaries’ tuition, fees, room and board (with exceptions), and other related costs (student activity fees, educational computer software, books, etc.). You can use it to pay for your education. Enrolled in a qualified university or technical school.

Can I use it for expenses other than higher education?

yes. Some of the often overlooked expenses that are treated as “Qualified Higher Education Expenses” are:

Elementary school and junior high school tuition. A 529 plan helps families pay for elementary and middle school public, private, or religious school tuition. However, distributions from 529 plans cannot exceed $10,000 per year for primary and secondary education payments per beneficiary.

apprenticeship program. Qualifying higher education costs also include certain costs incurred for participation in enrolled and accredited apprenticeship programs.

Special Assistance Services. A 529 plan can be used to pay for certain special needs services related to enrollment in or attendance at a qualifying educational program. If the requirements are met, the 529 plan can be rolled over tax-free to the designated beneficiary or a member of the designated beneficiary’s family’s her ABLE account. ABLE accounts enable additional tax-advantaged savings programs for individuals with disabilities without compromising public interest eligibility.

student loans. You can use up to $10,000 from your 529 plan to pay off student loans over the course of your student’s lifetime. Distributions may also be used to pay off student loans for siblings of designated beneficiaries. For example, if a 529 plan is established for Child A, her $10,000 student loan repayments for Child A and the $10,000 student loan repayments for Child A’s siblings would be considered eligible higher education institutions. is done. Fees are waived unless repayments exceed her $10,000 lifetime limit, which applies to Child A and Child A’s siblings individually. However, interest paid on student loans using distributions from the 529 plan is not eligible for the student loan interest deduction.

What are the tax implications of the 529 plan?

Income tax implications. The distribution of a 529 plan consists of two parts: return on capital (initial contribution) and return on investment (profit). The primary tax benefits of the 529 plan include tax-exempt accumulation of income and tax-exempt distribution if the distribution does not exceed eligible post-secondary education expenses. However, if the distribution exceeds eligible higher education expenses, the beneficiary will be subject to income tax on the portion of the distribution attributable to earnings (excess earnings).

The portion of the distribution resulting from the first contribution is not subject to income tax. Therefore, for federal income tax purposes, distributions are not taxable if they do not exceed the amount of eligible post-secondary education expenses. However, it is important to note that the distribution of primary and secondary education expenses, and other expenses that are treated as qualifying higher education expenses under the Internal Revenue Code, may not be exempt from certain state taxes.

Potential 10% penalty. Excess earnings are also subject to a 10% penalty unless an exception applies. An exception to this additional penalty applies if the beneficiary becomes disabled or dies. There are special rules that also apply if the beneficiary attends a U.S. military school or receives a scholarship or grant.

Tuition refund. If a student receives a refund of tuition fees paid, the actual cost may be less than the distribution withdrawn to cover the tuition fees for that semester. As a result, excess earnings are reported as gross income. Students must re-donate the refunded amount within 60 days after the refund to ensure that the distribution is not included in the total income.

impact of gift tax. Annual contributions to the 529 Plan that do not exceed the annual gift tax deduction are not subject to gift tax. However, if a donation is made in excess of the annual gift tax deductible, the taxpayer may elect to treat the donation as if he had made it over a period of five years.. It is important to note that each spouse can make a separate gift to the beneficiary each year. Donate $32,000 to avoid gift taxes based on your annual gift tax credit. Year.

record keeping. For audits, taxpayers are encouraged to obtain all records related to their 529 plan, such as receipts of bills paid and account statements.

The 529 Plan is just one tool to help ease the financial burden of education. Other avenues of support include American Opportunity and Lifetime Learning Credits and the Coverdell Education Savings Account. Therefore, it is important for clients to consult a tax advisor when using the 529 plan and other tax-advantaged savings plans or tax credits.

This article does not necessarily reflect the opinions of The Bureau of National Affairs, Inc., publishers of Bloomberg Law and Bloomberg Tax, or their owners.

Author information

Christine Balding Gatting He is a Principal at FORVIS, LLP and leads the company’s Tax Controversy and Proceedings group.

Kaitlyn Meehan He is the manager of FORVIS, LLP and is part of the company’s Tax Controversy and Proceedings group.

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