Tax Update: Qualified Tuition Programs

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Tax Update: Qualified Tuition Programs

Also called college savings plans or "Section 529 plans," these programs offer parents and other taxpayers a tax-favored means of funding a child's future and qualified higher education expenses. Under current law, earnings accumulate tax deferred and generally are taxable to the beneficiary when funds are distributed to pay expenses or education benefits are received. The beneficiary may claim a HOPE or Lifetime Learning Credit for the tuition and related expenses paid with the distribution, if otherwise eligible.

For tax years starting after 2001:

	Makes distributions or education benefits received from qualified tuition programs excludable from income, beginning in 2002 for state programs and in 2004 for qualified tuition programs maintained by an entity other than a state.
	Coordinates this income exclusion with the HOPE and lifetime Learning Credits so that the tax-free distribution cannot be used for the same expenses for which a credit is claimed.
	Sets limits on the room and board allowance that may be paid with tax-free distributions.
	Imposes, after 2003, an additional 10% tax penalty on Section 529 program distributions included in income.
	Expands the definition of "member of the family" for purposes of interfamily changes of designated beneficiaries to include first cousins of the original beneficiary.

For more information on how this tax law change will affect you, please feel free to contact either Bill Martin at ext. 222 or Jill Mandel at ext. 236.

847.850.5270 847.850.5271 - fax 1532 Barclay Blvd., Buffalo Grove, IL 60089 200 S. William St., Mt. Prospect, IL 60056
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