Sec. 529 plans - qualified tuition programs.The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001 (also known as EGTRAA 2001) ) can lead to many planning opportunities for qualified tuition programs (Sec. 529 plans). Qualified tuition programs generally fall into two categories:
1. Prepaid pre·pay
tr.v. pre·paid, pre·pay·ing, pre·pays
To pay or pay for beforehand.
pre·payment n. tuition plans, which allow a person to purchase tuition credits that entitle en·ti·tle
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.
2. To furnish with a right or claim to something: a beneficiary to the waiver or payment of qualified higher education expenses Qualified Higher Education Expense
Expenses such as tuition and tuition related expenses that an individual, spouse, or child must pay to an eligible post-secondary institution. (QHEEs); and
2. Savings plans, which allow a taxpayer to make contributions to an account established to meet a beneficiary's QHEEs.
Many states have established these programs to provide a vehicle for parents, grandparents grandparents npl → abuelos mpl
grandparents grand npl → grands-parents mpl
grandparents grand npl or others to help fund and save for a beneficiary's college education. Because of the increasing popularity of these programs, it is important for practitioners to understand their basic mechanics, as well as the changes made by the EGTRRA.
Qualified Distributions Now Tax-Free
Under prior law, the earnings portion of distributions from tuition programs for QHEEs was included in a beneficiary's gross income. The EGTRRA excludes from gross income distributions for QHEEs occurring after 2001, making them taxfree.
If post-2001 distributions exceed qualified expenses, however, the earnings excluded from the beneficiary's gross income are limited to an amount calculated by multiplying the earnings portion of the distribution by the percentage of the total distribution used for qualified expenses.
Example: In 2002, beneficiary B withdraws $12,000 ($7,000 in earnings and $5,000 in capital) from a tuition program, and uses only $9,000 for qualified expenses. Because only 75% ($9,000/$12,000) of the distribution was used to pay qualified expenses, only 75% of the earnings will be excluded from gross income. As such, only $5,250 ($7,000 x 75%) will be excluded from his gross income, while $1,750 will be taxable. In addition, a 10% penalty ($175) will be imposed on the taxable amount.
Limits on Exclusion and Coordination with Other Provisions
The amount of the distribution excluded from gross income is generally reduced by qualified scholarships and employer-provided educational assistance (excludible from income) and QHEEs taken into account in determining the Hope scholarship The HOPE Scholarship, created in 1993 by the state of Georgia legislature, is a university scholarship program that has been adopted by several other states. HOPE (a reverse acronym for "helping outstanding pupils educationally") is funded entirely by the revenue from the Georgia and Lifetime Learning credits Lifetime Learning Credit
A federal initiative whereby a person is eligible for a non-refundable credit for a specific amount spent on higher education tuition and fees during the year.
These fees can be for the person, his or her spouse, or his or her dependents. allowed the taxpayer or any other person (i.e., a parent claiming the student as a dependent). In addition, tax-exempt distributions from qualified tuition programs reduce the income exclusion amount for U.S. savings bond Savings bond
A government bond issued in face value denominations from $50 to $10,000, with local and state tax-free interest and semiannually adjusted interest rates.
A nonmarketable security issued by the U.S. interest and the deduction for interest on education loans. Finally, if a taxpayer uses distributions from both a qualified tuition program and an Education IRA Education IRA
A savings plan for higher education. Parents and guardians are allowed to make nondeductible contributions to an education IRA for a child under the age of 18. , and if the sum of the distributions exceeds the total of the QHEEs, any QHEEs must be prorated (using a reasonable method determined by the taxpayer) between the two programs.
Private Educational Institutions Can Now Establish Programs
Previously, only states could establish qualified state tuition programs. The EGTRRA removed the word "state," allowing private educational institutions to establish and maintain prepaid tuition programs. Note: The tax-free distribution rule discussed does not apply to private programs until Jan. 1, 2004.
Additional QHEEs Added, Modified
QHEEs generally include tuition, fees, books, supplies and equipment necessary for attendance. In addition, the EGTRRA added expenses for special-needs services. Congress wants IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. regulations to define a "special needs" beneficiary as including an individual who, because of a physical, mental or emotional condition, requires additional time to complete his education. Qualified expenses also include expenses for room and board. The EGTRRA replaces the $2,500 limit on room and board expenses with a rule that requires reasonable expenses, adjusted to reflect current costs for students who live off-campus and not at home. The educational institution that the individual attends will determine the amount. If the student lives on campus and the amount determined by the institution is less than invoiced, the student can use the actual invoiced amount.
An individual who contributes funds to a qualified tuition program can enjoy many benefits, such as taxfree savings for a beneficiary's education. However, the contributor should address a few considerations before writing any checks. For example, can he establish a brokerage account Brokerage Account
An arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transactions on the investor's behalf. using stocks, municipal bonds and index funds that will achieve a higher after-tax return than the qualified tuition program would earn? In addition, some individuals may be concerned because they will not have unlimited control over the investment of funds contributed to a qualified tuition program. These individuals may want to consider using an Education IRA (subject to its contribution and income limits) in lieu of Instead of; in place of; in substitution of. It does not mean in addition to. (or as a supplement to) a qualified tuition program. The bottom line is that there are many considerations, and the prudent individual should consider all of the issues before investing in a qualified tuition program.
FROM KENNETH WILSON, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , M.B.A., MERRILLVILLE, IN
Editor: Frank J. O'Connell, Jr., CPA, J.D. Crowe Chizek Oak Brook, IL