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New Ways to Use Distributions from Qualified Tuition Plans

October 5, 2018 | BerganKDV Team

Background

Qualified tuition plans (QTPs) have been widely used to pay for post-secondary education. QTPs would need to be maintained by a state, state agency, or by an eligible education institution. These would commonly be referred to as QTPs or 529 plans. They would allow for tax free growth and the distributions would not be taxed if they were utilized for qualified expenses: tuition, fees, books, supplies, and equipment; expenses for special needs services for a special needs beneficiary in connection with enrollment at an eligible educational institution; expenses related to the purchase of a computer or computer equipment that is to be used primarily by the beneficiary at an eligible education institution; or room and board incurred by a designated beneficiary enrolled at least half time at an eligible educational institution. Distributions that exceed the cost of higher education expenses are generally includible in gross income as well as subject to a 10% additional tax.

For tax year 2017 the state of Iowa allowed for a deduction of $3,239 per beneficiary. They follow the same rules as above but allow for a state deduction as well. For the Iowa amounts to qualify they need to either be deposited into a College Savings Iowa 529 plan or into an IA Advisor 529 plan.

New Law Explained

QTPs are now modified under the Tax Cuts and Jobs Act to allow for distributions for elementary and secondary education. Distributions are limited to $10,000 for secondary and elementary school tuition or in connection with enrollment of the designated beneficiary. This is a per student, not per account limitation.

The state of Iowa has adopted the federal treatment for allowing payments for elementary and secondary education. The deductible amount is increased annually for inflation and for 2018 will be $3,319 per person per beneficiary.

Examples

Jon and Kim have a daughter enrolled at a private elementary school in Iowa where tuition for 2018 is $7,500. They both are able to contribute $5,000 for a total of $10,000 contributed for their daughter’s education. During the year they use $7,500 for their daughter’s tuition. They can deduct $6,638 on their Iowa tax return as contributions to the plan.

Jim and Vikki have a daughter enrolled at a private elementary school in Iowa where tuition for 2018 is $12,000. They both are able to contribute $10,000 for a total of $20,000 contributed for their daughter’s education. During the year they can only use $10,000 for their daughter’s tuition. They can deduct $6,638 on their Iowa tax return as contributions to the plan.

Dan and Sharen have twin boys enrolled in a private elementary school. They plan on each spouse contributing $2,500 for each boy. Dan’s parents each plan on contributing $2,500 for each boy. All together each boy has $10,000 contributed to their 529 account. The boy’s tuition is $7,000 each for the year. They will be able to withdraw $7,000 for qualified tuition payments and each have $3,000 to grow tax free in their 529 account. Dan and Sharen will receive a deduction on their Iowa return of $10,000 and Dan’s parents will receive an Iowa deduction on their personal return of $10,000.

Planning Opportunities

Clients can use this as a tool to help pay for their children’s elementary or secondary education. Especially if they have been saving since their kids were born. This also allows for grandparents to pay for their grandchildren’s education while getting some tax savings through state of Iowa deductions.

Clients can contribute more than the state deductible amount as a way to receive tax free growth for the beneficiary’s college planning.

Parents with new born children can begin contributing as soon as their child is born and use the money to help offset expenses for education as the child begins elementary school while enjoying tax free growth those first few years of the child’s life.

State Considerations

  • Iowa allows for a deduction on the Iowa tax return and couples with the federal changes.
  • Minnesota does not have a state tax deduction for contributions to a Qualified Tuition Program, but they are still able to have tax free growth and tax-free distributions for education costs.
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