GIFT TAX TREATMENT OF TUITION PLANS

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GIFT TAX TREATMENT OF TUITION PLANS
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• Qualified tuition plans (QTPs) provide a means
  for family members and others to save for the
  future educational needs of children. Investment
  earnings within a QTP account are tax deferred
  and not taxable when withdrawn if used to pay
  qualified tuition and certain other
  expenses.Each individuals contribution to a
  QTP (also sometimes referred to as a Section 529
  plan) on behalf of a designated beneficiary is
  treated as a gift subject to the normal gift tax
  rules. Thus, no gift tax return is required for
  any contributor if the contribution is equal to
  or less than the amount of the gift tax annual
  exclusion for the year of the gift, which for
  2019 is 15,000.

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• Special Election  When a donors total
  contribution to a QTP for the year exceeds the
  annual exclusion amount, the donor may make a
  special election treating the contributed funds
  as if they had been contributed ratably over a
  five-year period starting with the year of the
  contribution.Example Grandpa Lee contributes
  75,000 to granddaughter Whitneys QTP in 2019.
  By using the election, grandpas contribution is
  treated as if the contribution was made equally
  over a five-year period that is, as if hed
  contributed 15,000 in each of 2019, 2020, 2021,
  2022 and 2023. If grandpa makes any more QTP
  contributions during those years, those
  contributions would then exceed the annul gift
  limit and require a gift tax return to be filed.
  The same would be true if grandpa makes other
  gifts to Whitney.

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• To make the five-year election grandpa must file
  a Form 709, Federal Gift Tax Return, for the
  calendar year in which the contribution is
  made.The election is available only with
  respect to contributions not in excess of five
  times the annual exclusion amount for the
  calendar year of the contribution. Any excess is
  treated as a taxable gift in the calendar year of
  the contribution. However, that does not
  necessarily mean any gift tax will be owed since
  there is also a unified gift and estate tax
  lifetime exclusion (currently in excess of 11
  million) that will shield most taxpayers like
  grandpa from any gift tax.

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• If grandpa were married, he and grandma could
  make an election under the gift-splitting rules
  for the QTP contribution to be made one-half by
  each of them, thus allowing them to double up on
  the annual and the special 5-year amounts.If in
  any year after the first year of the five-year
  period, the amount of the gift tax annual
  exclusion is increased for inflation, the donor
  may make an additional contribution in any one or
  more of the four remaining years up to the
  difference between the exclusion amount as
  increased and the original exclusion amount for
  the year or years in which the original
  contribution was made.

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• Example In 2017 when the annual gift tax
  exemption was 14,000, grandpa made a 70,000
  contribution to his granddaughters QTP and made
  the 5-year election. For 2018 the annual gift tax
  exemption was increased to 15,000. Thus, grandpa
  can make an additional 1,000 contribution for
  each of the remaining 4 years of the 5-year
  election period.
• Change of Beneficiary  A change in the
  designated beneficiary, or a rollover to the
  account of a new beneficiary, is treated as a
  taxable gift if the new beneficiary is assigned
  to a generation below the generation of the old
  beneficiary. Such a transfer isn't a taxable gift
  if the new beneficiary is a member of the family
  of the old beneficiary, and is assigned to the
  same generation, as the old beneficiary.

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• If the new beneficiary is assigned to a lower
  generation than the old beneficiary, the transfer
  is a taxable gift from the old beneficiary to the
  new beneficiary, regardless of whether the new
  beneficiary is a member of the family of the old
  beneficiary.In addition, the transfer would be
  subject to the generation skipping transfer tax
  (GST) if the new beneficiary is assigned to a
  generation which is two or more levels lower than
  the generation assignment of the old beneficiary.
  The five-year averaging election may be applied
  to a transfer.

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• Example Suppose Whitney had not used the funds
  from the QTP or has finished her higher education
  and had some funds left over in the plan, and
  grandpa (or the trustee of the account if grandpa
  is not the trustee) decides to change the account
  beneficiary to his great-granddaughter Annabelle.
  Since Annabelle is in a generation lower than
  Whitney, the change of beneficiary represents a
  gift from Whitney to Annabelle. However, the
  five-year averaging election may be applied to
  the gift.
• Eligible Expenses  Distributions from QTPs,
  including earnings on the amounts contributed to
  a QTP, arent taxed for income tax purposes if
  they are used to pay qualified higher-education
  expenses of the account beneficiary. In addition
  to tuition, eligible expenses include the
  following

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• Fees 
• Books 
• Supplies 
• Equipment 
• The purchase of computers or peripheral
  equipment, computer software, or internet access
  and related services that will be used primarily
  by the beneficiary while the beneficiary is
  enrolled at an eligible educational institution
• Room and board if the beneficiary is attending a
  qualified school at least half time and 
• A special needs students expenses that are
  necessary to enable the student to enroll or
  attend an eligible educational institution.

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• When distributions exceed eligible expenses, the
  beneficiary of the QTP is the one who would
  include the nonqualified distributions in his or
  her income. The calculation of the taxable amount
  of the distribution can be complicated if the
  beneficiary received a tax-free scholarship. In
  some cases a 10 penalty also applies on the
  taxable distribution that is included in
  income.While QTPs are generally intended to be
  used for higher education expenses, for years
  after 2017, up to 10,000 distributed from a QTP
  for tuition expense (but not for related other
  expenses) paid so the beneficiary can attend an
  elementary or secondary school (kindergarten
  through grade 12) is considered a qualified
  education expense that would be tax-free.
  However, some states have not recognized this
  provision, and so such distributions would be at
  least partially taxable for state purposes.

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• Direct Payment of Tuition  Some potential
  contributors to a QTP for family members may wish
  to pay for the tuition when it is actually
  incurred rather than saving for it in advance. If
  that individual makes the tuition payment
  directly to a qualified school, college or
  university the gift tax does not apply.If you
  have questions related to QTPs in general or
  changing beneficiaries, please give this office a
  call.

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• Phone - [phone]
• Email - info_at_taxreliefrus.com
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