QTP 529 plans Qualified Tuition Programs A to Z!

What is the benefit of a QTP Qualified Tuition Program and how does the QTP work?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-687-9900 x101 602-292-2009

What is the tax benefit of a QTP? No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses

A qualified tuition program (QTP) allows a taxpayer to make contributions
to an account or program to be used to pay qualified
higher education costs. (QTPs are sometimes called “Section 529
Plans.”) Two types of plans are available:
1) Prepaid programs. Contributions are used to purchase tuition
credits for a designated beneficiary (student).
2) Savings account plans. Contributions are made to an account
established to pay for the qualified higher education expenses
of a beneficiary (student).

Contributions
1) The contributor is not subject to any AGI limitations.
2) The amount that can be contributed to a QTP is limited to the
amount necessary to provide for qualified expenses of the
beneficiary (as determined by the plan).
3) The contribution is considered a completed gift; it is excluded
from the contributor’s estate.
4) Contributors can elect to take contributions larger than the
annual gift exclusion into account ratably over five years. For
example, an individual can contribute $65,000 to a QTP in 2011
without gift tax consequences provided no other gifts are made
to the account beneficiary in 2011. For years 2012–2015, the
$13,000 ($65,000 ÷ 5) gift allocated to that year is taken into
account for the annual gift tax exclusion in effect for those years.
5) Contributions to a QTP are not deductible.

Distributions
1) Distributions of earnings from QTPs are excluded from income
if used for qualified higher education expenses (no tax return
reporting requirements in that case). If distributions are more
than the beneficiary’s qualified expenses, the earnings portion
of the excess is included in the beneficiary’s income (reported
on line 21 of Form 1040).
2) The earnings portion of distributions not used for qualified
higher education expenses also is subject to a 10% penalty
(computed on Form 5329).
3) Taxpayers should receive Form 1099-Q, Payments from Qualified
Education Programs (Under Sections 529 and 530), from
the QTP showing information related to QTP distributions.

The 10% penalty does not apply:
• When the distribution is due to the beneficiary’s death or disability.
• When the distribution is included in income because the beneficiary
received a tax-free scholarship, veteran’s educational
assistance or employer-paid educational assistance.
• When the beneficiary attends a U.S. Military Academy. (See IRS
Pub. 970.)
• When the distribution is included in income because
the qualified education expenses were
reduced by the amount of those expenses used
in determining an education credit.

Qualified higher education expenses include:
• Tuition, fees, books, supplies and equipment required
for attending an eligible school.
• Reasonable costs of room and board for those who are at least
half-time students in a degree program.
• Expenses of a special-needs beneficiary with a physical, mental
or emotional condition that requires additional time to complete
his education.
Example: In 2011, John incurred $6,700 of qualified education expenses,
which were paid from the following sources:
Partial tuition scholarship (tax-free)………………………………… $3,100
QTP distribution ……………………………………………………… 3,700
To compute the taxable portion of her QTP distribution, John must reduce his
total qualified education expenses by any tax-free educational assistance.
Total qualified education expenses ………………………………… $6,700
Tax-free educational assistance …………………………………… <3,100>
Adjusted qualified education expenses (AQEE) ………………….. $3,600
Since the remaining expenses ($3,600) are less than the QTP distribution,
part of the earnings will be taxable. John’s Form 1099-Q shows that $1,200
of the QTP distribution is earnings so he computes the taxable part of the
distributed earnings as follows:
$1,200 × $3,600 AQEE = $1,168 (tax-free earnings)
$3,700 distribution
$1,200 – $1,168 = $32 (taxable earnings)

John must include $32 in income on Form 1040, line 21; however, the amount
is not subject to the 10% penalty since it’s taxable because of her receiving
a tax-free scholarship.

Coordination With Other Education Benefits
1) Contributions may be made to a QTP and an ESA for the same
beneficiary during the same year.
2) An education credit can be claimed in the same year that a
tax-free distribution is received from a QTP if the distribution
from the QTP is not used for the same expenses for which the
credit is claimed.
3) To determine the taxable portion of a QTP distribution, qualified
expenses are reduced in the following order: (a) amounts paid
with nontaxable income, such as scholarships and employerprovided
education assistance, then (b) amounts used to claim
education credits. If a student receives distributions from both
a QTP and an ESA that total more than the reduced expenses,
the expenses must be allocated between the distributions

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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