|
In 1996 Congress established the qualified state
tuition program. The program was
expanded in 1998 and again in 2001.
The plan is sometimes called a 529 plan
and several different brokerage houses are representing some of the states.
The law allows states to set up tuition programs.
Under the plan, you transfer funds to the tuition program designed for this
purpose, and the funds will be held in a special account to be used to cover
future higher education costs for the individual you designate as the
beneficiary. Qualified costs are those for tuition, fees, books, supplies,
equipment, and room and board. Expenses for graduate level courses qualify.
The funds are invested while held by the program,
although you will not have the right to direct the investment. The earnings
are not taxed while the funds are in the program. This is the central tax
benefit of the plan: it permits tax-free growth on the funds set aside for
future education expenses.
When the funds are used for the beneficiary's higher
education, only the earnings will be taxed to the beneficiary, not the
contributions. Note, as well, that the earnings are taxed to the child (at his
or her low tax rates), and not to you. Of course, you can make a separate
transfer to the child to cover this tax liability. NOTE:
Effective for tax years after 2001 and before 2011, the
earnings will not be taxable if used for qualified education expenses.
If the funds in the program are refunded to you and
not used for the beneficiary's higher education, the program will impose a
penalty on the refund (unless the refund is made on account of a scholarship
received by the beneficiary which reduces the tuition needs). Additionally, in
the event of a refund, of course, the earnings in excess of your contributions
will taxed to you instead of the beneficiary.
Effective 1-1-2002, a penalty of 10% will also be due to IRS (it is expected
that most states will drop their penalty, but check with the state sponsoring
your plan).
A contribution to a qualified tuition program is subject to the gift tax,
but contributions are eligible for the $11,000 annual gift tax exclusion. A
distribution from a qualified tuition program isn't a taxable gift. A change
in the beneficiary under the program, or a rollover to the account of a new
beneficiary, is a taxable gift and a generation-skipping transfer from the old
beneficiary to the new beneficiary only if the new beneficiary is assigned to
a generation below the old beneficiary.
No amount in a qualified tuition program is
included in the estate of any person for estate tax purposes, except for an
amount distributed on account of the death of a beneficiary. Thus, the value of
an interest in a qualified tuition program is included in the estate of the
designated beneficiary, not in the estate of the contributor.
You can find much
more information and links to the each state's plan at SavingforCollege.com
|
