Improvements to Section 529 - College Savings Programs

College savings plans, also known as Section 529 plans, have become a popular tool for parents and grandparents to invest funds for a youngster's higher education costs. These plans are state-sponsored, with each state pairing up with one or more investment institutions to offer the investment alternatives. The primary tax feature is that the investments grow tax-free and can be extracted tax-free if spent on the beneficiary's higher education costs.


Legislative Enhancements

In tax legislation enacted late in 2015, Congress made three improvements to the rules governing 529 plans. These changes affect 529 pan disbursements during college years. in order to take advantage of several of these new rules, the parent or custodian of the 529 plan will need to understand the opportunities presented by the modified law.


Computer and Technology Costs

The legislation expands the definition of qualified higher education expenses to include computer or peripheral equipment, software, and internet access if the technology is to be used primarily by the beneficiary during higher education years. Previously, computer and technology expenses were only qualified for tax-free 529 plan reimbursement if the technology was required for enrollment or attendance at the school.


Per Account Tax Treatment

Many students will approach college with multiple 529 accounts because parents and grandparents have separately established plans for the student. in the past, all 529 plans of a beneficiary were aggregated as if one account, for the purpose of determining the amount of income associated with a distribution not properly expended on higher education costs. But this aggregation rule has been repealed, meaning that an excess withdrawal looks only to the specific 529 account to determine the amount of taxable income. If a student has funds in various 529 accounts, there are obvious strategies. College tuition and other qualified costs should be covered by those 529 accounts with the highest appreciation or earnings; nonqualified costs such as a vehicle or other transportation expenses should be drawn from the 529 account with the lowest income or gain.


Refund of Higher Education Costs

In some cases, after payment of tuition and other higher education costs using a 529 account, the student may receive a refund from the school. For example, assume a student wins a last-minute scholarship that is paid directly to the school, and as a result, the school reimburses previously paid tuition. In the past, if that tuition has been paid from a 529 account, the effect was that an excess distribution occurred because a 529 withdrawal was not fully consumed by college costs. The tax law now allows the family to place the tuition reimbursement back into the 529 plan within 60 days of receipt in order to avoid a taxable distribution.



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Nelson & Company, P.S., CPAs Since 1979

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