Advanced Underwriting Consultants

Question of the Day – June 19

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client is implementing a Section 529 plan for her daughter.  What are the Illinois state income tax consequences of doing that?

Answer:  Each state takes its own position with regard to the tax treatment of Section 529 plans.  State rules may differ with regard to tax deductions and tax credits for contributions.  Likewise, rules may differ with regard to the tax treatment of distributions.

Illinois permits Illinois taxpayers to deduct contributions to Illinois’s own Section 529 program—the Bright Start program.  It does not allow Illinois taxpayers a tax deduction for contributions to other states’ Section 529 plans.

Qualified distributions from any state’s Section 529 plan are exempt from Illinois state income tax.  See this link:

http://tax.illinois.gov/LegalInformation/letter/rulings/it/2002/ig020004.pdf.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – November 27

Ask the Experts!

Here’s the question of the day.

Question:  My client owns a Section 529 plan for the benefit of her daughter.  The client paid for the daughter’s college tuition in 2011 out of her own funds, and wants to take a distribution from the 529 plan now to reimburse herself.  Would that be a qualified tax-free distribution?

Answer:   Probably not.

Distributions from state qualified tuition programs are fully excludable from gross income if the distributions are used to pay “qualified higher education expenses” of the designated beneficiary.

IRS Announcement 2008-09 acknowledges that Section 529 and its regulations are unclear as to whether a distribution, say, in 2012 can be used to pay qualified expenses incurred in 2011 or earlier.  The announcement seems to imply that there is a March 31 deadline for paying the qualified expenses of the prior year only.

It is possible that eventually the IRS will issue regulations that cover the question asked.  In the meantime, it is safest to recommend to clients that they take 529 plan distributions in the same calendar year that the beneficiary has qualified higher expenses.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.