Tax Advantages & Implications of a College Illinois! Plan.

Some customers who enroll in 529 plans aren’t really sure of the tax implications of a prepaid tuition plan like College Illinois!. We often get questions about the tax advantages of the program and the effects of rolling over from one savings plan to a prepaid plan. Now before I explain the various implications, I must say that I am neither a tax preparer nor a financial planner, so I must recommend that you speak with your advisor to get more detailed information.

One of the first things you should know is that College Illinois! is 100% exempt from federal and Illinois state income tax. As long as plan benefits are used for qualified college expenses, the plan earnings are not subject to federal or state income tax. In addition, individuals subject to Illinois state income tax can deduct from their taxable income up to a maximum of $10,000 per year for contributions made toward the purchase of any College Illinois! prepaid tuition contract. Married couples filing jointly can deduct up to $20,000 per year. This state tax deduction reduces the individuals' adjusted gross income (AGI) by the amount contributed up to $10,000 (or $20,000 for those filing jointly).

But what if a grandparent, relative or a really nice friend wants to give money to the fund as a gift—can they do that? Of course…any individual may "gift" or contribute to a 529 plan up to a maximum of $65,000 in a single tax year without incurring gift taxes. After gifting that amount, the purchaser will be permitted to claim a $13,000 gift tax exclusion for each of five successive tax years.

What about rollovers?

Are there tax implications on that as well? In these tough economic times, several purchasers are looking to “roll” out of their savings plan and into something that is a lot more secure and not based on the performance of the stock market but still offers the same great tax advantages. You may roll over funds from another 529 qualified tuition program, Coverdell Education savings account or certain qualified US savings bonds to College Illinois! without negative tax consequences. The College Illinois! account must be established and you as the account owner must request the transfer of funds from the other institution. Our Rollover Reporting Form must then be completed and sent to College Illinois! along with documentation from the transferring institution that shows the basis versus earnings portion of the rollover or the entire rollover will be treated as earnings. In order to retain the tax-free treatment of the rollover, all withdrawals must be transferred to College Illinois! within 60 days of the initial withdrawal. You may roll over funds from a savings to a prepaid plan for the same beneficiary once every 12 months without federal tax consequences. You may rollover funds at any time without tax consequences if you change the beneficiary to a member of the family , as defined by the IRS, to include virtually any relative of the previous beneficiary.

For more information on the tax implications of a 529 plan, don’t forget to call your tax advisor or you can call the IRS at their toll-free number 1-800-829-1040 or go to their website www.irs.ustreas.gov. Publication 970 - "Tax Benefits for Higher Education" addresses a variety of education tax benefits and can be downloaded from the IRS web site.