As we all know, cost of college tuition is going through the roof! Therefore, planning for college costs is a very important financial decision. 529 Plans are Qualified Tuition Programs that allow for an investment account to be established, specifically funding a child’s future college costs. Favorable tax results are achieved, regardless of the family’s level of adjusted gross income on their income tax return.
The ideal situation is to have the parents and/or grandparents open up a 529 plan for each child, shortly after they are born. The contributions to a 529 plan are not deductible for Federal income tax purposes (they may be deductible for state tax purposes, depending on the state), but the earnings in the account grow tax free. In addition, distributions from the 529 plan are tax-free up to the amount of the student’s “qualified” higher education expenses. These expenses include tuition, fees, books, supplies, required equipment, and reasonable room and board. Any distributions in excess of the amount of qualified higher education expenses are subject to tax, to the extent of the earnings in the account. In addition, a 10% excise tax penalty is imposed on the excess distribution.
The initial contributions to the 529 plan are considered to be a taxable gift to the donor. However, if the contribution is less than the annual gift tax exclusion amount, currently $14,000 for 2015, there is no gift tax filing requirement for the donor. In addition, a person can contribute up to five times the exclusion amount ($70,000 for 2015), and will not have a taxable gift, and will not deplete their lifetime gift/estate tax exclusion amount. However, in this case, they will have to file an annual gift tax return and elect to treat the gift ratably over five years for gift tax reporting purposes.
529 plans are established by each individual state. You do not have to choose the state plan of your resident state, but there could be adverse state tax consequences for not doing so. If you set up a 529 plan for a child, who decides not to attend college, you can roll over the 529 plan tax-free to a 529 plan belonging to another member of the family.
If you have questions regarding funding your children’s college education, we can help you navigate through these confusing IRS regulations. Please contact Andrew Ross, CPA at Bedard, Kurowicki & Co., CPA’s at (908) 782-7900 or visit www.bkc-cpa.com.