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Senate Finance Committee Unanimously Approves Changes to Section 529 Plans.

(Parker Tax Publishing May 7, 2015)

The Senate Finance Committee unanimously approved a bill that would make three key changes to Code Sec. 529, expanding the tax benefits provided by qualified tuition programs. The bill mirrors similar legislation that passed the House with overwhelming bipartisan support in February. S. 335.

Background

On April 29, the Senate Finance Committee approved S. 335, a bipartisan bill introduced by Chuck Grassley (R-Iowa) that would modernize college savings plans by making three key changes to Code Sec. 529. The bill mirrors similar legislation in H.R. 529, which passed the House by a 401-20 vote in February. S. 335 will now move to the full Senate for additional debate. The bill will need to be passed by both the Senate and the House and signed by the President before it becomes official law.

A qualified tuition program (QTP) under Code Sec. 529 (commonly referred to as a "qualified tuition plan" or "529 plan") is a program established and maintained by either a state (or an agency or instrumentality of a state) or an eligible educational institution under which a taxpayer can prepay, or contribute to an account that will be used to pay a designated beneficiary's qualified higher education expenses.

Qualified higher education expenses are expenses related to enrollment or attendance at any college, university, vocational school, or other postsecondary educational institution that is eligible to participate in a student aid program administered by the U.S. Department of Education. This includes most accredited public, nonprofit, and private postsecondary institutions.

Although contributions to a QTP are not deductible, a distribution to a designated beneficiary generally is not includible in the income of either the beneficiary or the taxpayer who made the contributions.

Modernization of 529 Plans

The bill would make three key changes to the way college savings plans operate under Code Sec. 529.

First, it would restore a temporary rule that had been in place during 2009 and 2010 which allowed qualified higher education expenses to include computer purchases for use by the beneficiary while enrolled in an eligible institution.

Second, it would remove outdated distribution aggregation requirements, considered a burden on plan administrators. Under prior law, distributions from QTPs were taxable and administrators were required to aggregate all distributions from 529 accounts in a single state with the same beneficiary for tax purposes. In 2001, the law was changed, providing that savings were taxed only before being placed in QTPs, and would not be taxed upon distribution. Because distributions for qualified expenses are no longer taxable under current law, the aggregation rules are outdated and would be removed by S. 335.

Third, the bill eliminates the tax and penalty on any refunds provided from colleges where the student has withdrawn from the school. Currently, if a student is refunded distributions used to pay for qualified expenses, the refunded amounts are subject to immediate taxation and an additional 10 percent penalty. S. 335 would eliminate this penalty and the tax on the distribution if the refund is recontributed to the beneficiary's QTP within 60 days.

If passed, the amendments to Code Sec. 529 made by S. 335 would apply to distributions made after Dec. 31, 2014. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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