By: Chintamani
Qualified Tuition Plans (QTP), also known as 529 Plans, have become a very popular way for parents and grandparents to save for the college education of their children and grandchildren. There are many taxpayers with a good deal of money sunk into Qualified Tuition Plans. Unfortunately, these plans did not escape the hits of the recent economic downtrend any more than other savings plans. This fact raises important questions about 529 Plan losses. Can a contributor claim the losses on a 529 plan? Can the contributor liquidate the 529 Plan, claim a loss and reinvest the proceeds in another QTP for the beneficiary?
Fortunately, the answer to these questions is yes, with a few qualifiers. Losses on a QTP are deductible by the account owner. The deductions only apply if all of the amounts from that account have been distributed and the total of the distributions are less than the contributions made to the account minus any prior withdrawals from the account.
The loss must be listed as a miscellaneous itemized deduction and is subject to the 2% of Adjusted Gross Income limit. The funds can be reinvested, but not too quickly. The Internal Revenue Service provides that distributions that are rolled over for another QTP investment within sixty days of the distribution are not taxable. That means that an account that is worth less than the contributor’s basis and is rolled over within sixty days has no tax consequences. Therefore, that account receives no loss deduction.
So, if you liquidate a Qualified Tuition Program and the distribution totals are less than the initial investments (the contributor’s basis), you should wait more than sixty days before rolling over the funds into another Qualified Tuition program. Still, accepting that you jump through all these hoops, you will still only qualify for an itemized miscellaneous deduction on the loss that is subject to the 2% of Adjusted Gross Income floor.
The Qualified Tuition Program is a write-off, assuredly, but not a particularly attractive one.
About the Author
Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. His famous Tax eBook “Stop donating your money to IRS” which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax. Just visit his website http://www.planningyourtax.com/ and claim your FREE eBook.
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