Favorable Qualified Tuition Plan Changes
Among the tax disappointments of 2008, one bright gem occurred late in the year. This change affects those parents, grandparents, aunts, uncles, friends, beneficiaries, and others who have established or plan to benefit from Qualified Tuition Programs (also known as Section 529 Plans). These programs offer a number of tax and financial benefits for families or friends helping to fund the cost of a student’s higher education costs.
Contributions to these plans are not deductible for federal income tax purposes, but earnings accumulate tax-free and distributions are tax-free to the extent used to pay for qualified higher education expenses (tuition, books, supplies, equipment required to enroll, and room and board for students attending college at least half-time). There is no limit to the amount that may be contributed to a 529 plan on behalf of any designated beneficiary (the student), but those contributions are considered to be gifts to the beneficiary. As a result, any amount contributed in excess of $12,000 per year ($24,000 for husband and wife) for the benefit of any one beneficiary may be subject to gift tax. A special provision, however, allows contributions for five years ($60,000 per individual; $120,000 for a married couple) for any one beneficiary to be aggregated into one year without gift tax consequences. There is no limit to the number of beneficiaries for which an individual may establish section 520 plans. This can be an excellent estate planning vehicle allowing an older generation to move considerable wealth from their estates and at the same time, provide education assistance to younger family members.
Plan contributions must be made in cash. Therefore, it is not possible to contribute securities that have lost value in the recent market decline and enjoy tax-free appreciation in a section 529 plan when the values recover.
Section 529 plans are appropriate for children, grandchildren, and other family members who will not be attending school for some time. The time factor allows the investments to grow. An individual wishing to provide education support for one who is already in school should make payments directly to the institution rather than reimbursing the individual for school costs. Payments made directly to the institution are not subject to gift tax.
One (of several) limitation to qualified tuition plans is that neither the contributor nor the designated beneficiary may control, either directly or indirectly, the investment of the contributions or the earnings thereon. Contributors are initially offered a choice of several, generally very conservative, investment portfolios. The Internal Revenue Service, does however, permit a change in the investment strategy for these plans once per calendar year, and upon a change in the designated beneficiary of the account.
The favorable development last year allows a change in the investment strategy twice in 2009, as well as upon a change in designated beneficiary. This will help section 529 investors change the investment portfolio early this year to mitigate continued losses in the current portfolio, and make another change later in the year as market conditions warrant.
This is only a brief synopsis of the somewhat complex rules related to qualified tuition programs. If you have questions concerning financial planning for education of your family or friends, call me at 214.957.3366 or email me.
Ronnie
Copyright 2009 Ronnie C. McClure, PhD, CPA