Ø What is a Qualified Higher Education Institution for 529 plans?
An eligible postsecondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition.
Note: The educational institution should be able to tell you if it’s an eligible educational institution.
An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.
Ø What is a Qualified Higher Education Expense for 529 plans?
Qualified expenses incurred at a qualified higher education institution (The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school):
Ø Tuition and fees.
Ø Books, supplies, and equipment.
Expenses for special needs services needed by a special needs beneficiary must be incurred in
connection with enrollment or attendance at an eligible educational institution.
Ø Expenses for room and board must be incurred by students who are enrolled at least
half-time. The expense for room and board qualifies only to the extent that it is not more than
the greater of the following two amounts:
1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for an academic period and living arrangement of the student.
2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
Note: You will need to contact the eligible educational institution for qualified room and board costs.
The purchase of a computer, computer software, or interest access and related services if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible post-secondary school.
Ø How is the allowable room and board cost determined for distributions from a 529 plan?
Publication 970 - On campus vs off campus (School makes that delineation.)
Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
Ø Can I use my 529 plan for K-12 education expenses?
Only expenses for no more than $10,000 of tuition, incurred by a designated beneficiary, regarding enrollment or attendance at an eligible elementary or secondary school.
Important: This rule applies to federal taxation. Some states conform to this definition whereas other do not conform and may make distributions for these purposes taxable on the state level.
Ø How are distributions from a 529 plan treated for tax purposes?
If distributions from a 529 plan are used to pay for qualified higher education expenses, the amount received is nontaxable.
If distributions are taken for non-qualified expenses, the earnings portion of a 529 distribution are included in income and subject to a 10% penalty. The portion of the distribution that represents a return of basis is nontaxable.
Ø How will the receipt of a scholarship or grant impact a distribution from a 529 plan?
Qualified expenses are reduced by the amount of any tax-free scholarships or nontaxable grants received. However, taxpayers may still distribute funds from their 529 up to those amounts. The earnings portion of the distribution will be considered ordinary income in this case but the earnings will not be subject to the 10% penalty.
Ø How does the 5-year accelerated gift to a 529 plan work?
If in 2018, you contributed more than $15,000 to a qualified tuition plan (QTP) on behalf of any one person, you may elect to treat up to $75,000 of the contribution for that person as if you had made it ratably over a 5-year period. The election allows you to apply the annual exclusion to a portion of the contribution in each of the 5 years, beginning in 2018. You can make this election for as many separate people as you made QTP contributions. You can only apply the election to a maximum of $75,000. You must report all of your 2018 QTP contributions for any single person that exceed $75,000 (in addition to any other gifts you made to that person).
How do I report an accelerated gift into a 529 plan?
For each of the 5 years, you report in Part 1 of Schedule A one-fifth (20%) of the amount for which you made the election. In column E of Part 1 (Schedule A), list the date of the gift as the calendar year for which you are deemed to have made the gift (that is, the year of the current Form 709 you are filing). Do not list the actual year of contribution for subsequent years.
However, if in any of the last 4 years of the election, you did not make any other gifts that would require you to file a Form 709, you do not need to file Form 709 to report that year's portion of the election amount.
Ø Can I change the beneficiary of a 529 plan?
Yes. There are no income tax consequences if you change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.
Ø Can I rollover assets between different 529 plans?
Any amount distributed from a QTP isn't taxable if it's rolled over within 60 days to either:
• Another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse), or
• An ABLE account for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family (including the beneficiary’s spouse). But this doesn’t apply to the extent the amount distributed when added to other amounts contributed to the ABLE account exceeds the annual contribution limit. For more information about ABLE accounts
Important Note: If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary.
Ø Will a 529 plan be included in my estate?
529 accounts that you are the owner of and not the beneficiary of are generally not included in your estate when you pass away.
Ø What are the gift tax implications of changing the beneficiary of a 529 plan?
If the new beneficiary is assigned to a lower generation than the old beneficiary, the transfer is a taxable gift from the old beneficiary to the new beneficiary regardless of whether the new beneficiary is a member of the family of the old beneficiary. In addition, the transfer will be subject to the generation-skipping transfer tax if the new beneficiary is assigned to a generation which is two or more levels lower than the generation assignment of the old beneficiary.
Publication 970 - 529 plan information
IRS Form 709 Instructions – 529 accelerated gifting rules
You'll receive an IRS Form 1099-Q if someone has contributed money to a 529 plan or a Coverdell Education Savings Account (Coverdell ESA) and designates you as the beneficiary.
If someone has contributed money to a 529 plan or a Coverdell Education Savings Account (Coverdell ESA) and designates you as the beneficiary, you will receive an IRS Form 1099-Q when you start tapping into those funds. When you receive the 1099-Q each year, it may be necessary to include some of the amounts it reports on your tax return.
Qualified education programs
There are two types of qualified education programs: state-sponsored 529 plans and Coverdell ESAs. Both types of accounts allow the account owner to set aside money to cover the qualified education expenses for the person who is designated as the beneficiary. The tax benefit of both programs is that the IRS allows account contributions to grow tax-free, meaning neither the beneficiary nor the account owner has to pay tax on account earnings.
Beneficiary receives 1099-Q
The person or entity who manages the education program has an obligation to report annual distributions on Form 1099-Q to the IRS and to the beneficiary. However, the account owner (such as a parent) will receive a copy of the 1099-Q instead if the distributions from a 529 plan aren’t made directly to the beneficiary or to an educational institution for the benefit of the beneficiary.
When the beneficiary enrolls in school and starts taking distributions to pay school expenses, he will begin receiving a Form 1099-Q each year. And as long as the distributions are used to pay only qualified education expenses, the beneficiary doesn’t pay income tax on the distributions.
Information reported on 1099-Q
Box 1 of your 1099-Q will report the total distribution from your education program for the year, regardless of whether the funds are sent directly to the school. Box 2 reports the portion of the distribution that represents account earnings, while Box 3 reports the portion representing the original contribution to the account. In other words, the amount reported in Box 3 must equal Box 1 minus Box 2.
In some cases, your 1099-Q may include the fair market value of the account. Boxes 4 through 6 provide additional information, but they have no impact on whether some of your distributions are reportable on a tax return.
Beneficiary tax implications
For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well. Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.
Question: Please discuss the taxation and gifting consequences when you change the beneficiary of a 529 plan?
Bene may have to pay gift tax on the amount xferred to a new bene. (for example husband is the owner wife is bene then they fully fund and xfer it to a new child)