Qualified Tuition Programs (QTPs) – 529 plans
A Qualified Tuition Program (QTP), also called a 529 plan is an education savings plan operated by a state or educational institution designed to either let you prepay or contribute to an account established for paying a student’s qualified higher education expenses at an eligible institution. You can set one up and name anyone as a beneficiary – a relative, a friend, even yourself. Owner and beneficiary do not have to be related. Once an account is established, contributions to the account could be made by you and others who wish to help fund it. 529 plans allow you to keep control of the account. Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits. There are lifetime contribution limits, which vary by state plans. However, be aware that there may be gift tax consequences if your deposits to a 529 plan exceed $15,000 during the year ($30,000 for married couples making the proper election).
Although contributions are subject to the annual $15,000 gift tax exclusion, an election can be made on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return to gift up to $75,000, or $150,000 per couple in one year (for spouses who gift split), if you make no further gifts to that recipient in the next five years. The $75,000 or $150,000 per couple gift is spread out over the next five years. (If the contributor dies before the end of the five-year period, the portion of the gift allocable to the years remaining in the five-year period would be in the contributor’s estate for federal estate tax purposes.)
It is important to note that a 529 plan does not give you a tax deduction for federal income tax purposes but earnings in the account grow tax-deferred. 529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Even though you don’t get a federal tax break for contributions to a 529 plan, the state of Arizona offers a tax deduction for investing in the Arizona 529 plan of up to $4000 for married taxpayers filing a joint return and $2000 for single taxpayers. Arizona has also established a maximum account balance limit of $476,000 effective October 1, 2018 for contributions to the account(s) of each beneficiary. Generally, once the account reaches the state-designated maximum, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.
Every state administers at least one 529 plan, however you are not restricted to use your own state’s 529 plan. You can invest in almost any 529 college savings plan no matter where you live. But the market is competitive and you may find another plan you like more. You can shop around and set up an account in a different state. Contributions to a 529 plan do not have to be reported on your federal income tax return and you won’t receive a form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of education.
There are no tax consequences if you change the designated beneficiary. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family, as defined by tax laws.
Federal tax reform and 529 Plans
Beginning with 2018 tax year, the following changes have been made to 529 Plans:
New law. For distributions after December 31, 2017, “qualified education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. Action is required by the Arizona State Legislature to extend favorable Arizona state tax treatment to withdrawals for K-12 tuition taken from this plan.
A person making gifts totaling more than $15,000 per year to any one individual may owe gift taxes.
If you are considering making gifts over $15,000 during the course of the year we suggest you talk to us early on.