Section 529 Plans - Qualified Tuition Program: COLLEGE SAVINGS PLANS THAT THE IRS EMBRACES

by Jaburg Wilk
Contact

[author: Beth S. Cohn]

As higher education costs continue to escalate, parents or grandparents may look to different savings vehicles for their children’s college fund.  The IRS, under section 529, provides parents with the opportunity for a higher education savings plan.

There are two sets of tax rules for 529 plans (the “Plan”).  One relates to the income taxation of the owner and the beneficiary of the Plan, while the other relates to gift tax consequences of making a contribution and/or changing beneficiaries. It is important to take advantage of contributions, gain on investments and beneficiary flexibility to enjoy the maximum benefits from a 529 plan.

Contribution Limits and Eligibility for Use of Funds

There are no specific contribution limits or age limits for the use of funds; however, the amount contributed must be used by the beneficiary for "qualified higher education expenses”.  The IRS defines qualified expenses to include tuition, books, supplies, fees and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.  Eligible schools include colleges, universities, vocational schools, or other post-secondary schools eligible to participate in a student aid program of the Department of Education. This is a very broad definition and includes nearly all accredited public, nonprofit, and proprietary (for-profit) post-secondary institutions. A school knows whether or not it qualifies and can provide that information to potential students.  To be qualified, the Plan needs to have safeguards that prevent contributions for a beneficiary in excess of the amount necessary to fund qualified higher education expenses for the beneficiary.

Income Tax Consequences of Contributions and Distributions

Contributions made to a 529 plan are not deductible from income taxes.   However, accrued earnings in the plan are tax free.  Distributions to a beneficiary generally do not have to be included as gross income to the beneficiary, if the distribution is less than or equal to qualified higher education expenses.   If there are distributions made in excess of the amount used by the beneficiary to pay qualified higher education expenses then those distributions are included in gross income of the beneficiary.  If there are earnings in the excess distribution, then they are also subject to a 10% penalty. 

Gift tax Consequences of the Contribution

A contribution to a 529 plan is treated like a gift from the owner of the Plan to the Beneficiary.  The annual gift tax exclusion applies, which in 2012 is $13,000 per donee per year.  The gift tax exclusion may be adjusted by the IRS annually.  If the amount put in to the 529 Plan exceeds the annual exclusion for a given year, the excess amount can be applied against the annual exclusion ratably over 5 years.  This functions like a carryover, and an election has to be made.  In any tax year that an amount is carried over, the total annual exclusion, including the carried over amount, cannot exceed the annual exclusion limit.  If no other gifts are given to the beneficiary, the total amount that can be placed into a 529 Plan and qualify for the annual gift tax exclusion over 5 years is $65,000.  The owner will need to file a gift tax return and use part of their lifetime exemption if the contributions exceed the annual gift tax exclusion.

Change of Beneficiaries

In the event that the child (beneficiary) does not use all of the funds for qualified higher education expenses, then the beneficiary of the 529 Plan can be changed.   The new beneficiary has to be a family member of the old beneficiary to avoid adverse tax consequences for the beneficiary change.  This provides much needed flexibility in the event that the original designated beneficiary does not attend college or receives a full scholarship.  Another child can be named as long as the child is a member of the family.  If funds remain in the 529 Plan after a beneficiary has finished school, a younger child can be named beneficiary of the Plan.   There may also be gift tax consequences on the change of the beneficiary.  The IRS currently defines Members of the beneficiary's family as follows.

“For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary

  1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
  2. Brother, sister, stepbrother, or stepsister.
  3. Father or mother or ancestor of either.
  4. Stepfather or stepmother.
  5. Son or daughter of a brother or sister.
  6. Brother or sister of father or mother.
  7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  8. The spouse of any individual listed above.
  9. First cousin.”

Source: http://www.irs.gov/publications/p970/ch08.html#en_US_2011_publink1000178575

This is a general overview of the IRS rules on Section 529 plans.   It is not an exhaustive analysis.  These rules are very complicated, and we recommend that you consult a tax professional before establishing a 529 plan.

About the author: Beth S. Cohn is a shareholder at the Phoenix law firm of Jaburg Wilk where she assists clients with business, tax, gifting programs, succession planning, asset protection and estate planning. She chairs the business law department and is a State Bar of Arizona certified tax specialist and a CPA. Beth can be reached at bsc@jaburgwilk.com or 602.248.1030.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be and may not be relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jaburg Wilk | Attorney Advertising

Written by:

Jaburg Wilk
Contact
more
less

Jaburg Wilk on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.