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H&r free federal 8. H&r free federal   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. H&r free federal Half-time student. H&r free federal How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. H&r free federal ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. H&r free federal Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. H&r free federal If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. H&r free federal You cannot deduct either payments or contributions to a QTP. H&r free federal For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. H&r free federal What is the tax benefit of a QTP. H&r free federal   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. H&r free federal See Are Distributions Taxable , later, for more information. H&r free federal    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. H&r free federal See Coordination With American Opportunity and Lifetime Learning Credits, later. H&r free federal What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. H&r free federal QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. H&r free federal The program must meet certain requirements. H&r free federal Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. H&r free federal Qualified education expenses. H&r free federal   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). H&r free federal As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. H&r free federal See Half-time student , later. H&r free federal The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. H&r free federal Tuition and fees. H&r free federal Books, supplies, and equipment. H&r free federal Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. H&r free federal Expenses for room and board must be incurred by students who are enrolled at least half-time. H&r free federal The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. H&r free federal The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. H&r free federal The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. H&r free federal You will need to contact the eligible educational institution for qualified room and board costs. H&r free federal    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. H&r free federal Designated beneficiary. H&r free federal   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. H&r free federal The designated beneficiary can be changed after participation in the QTP begins. H&r free federal If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. H&r free federal Half-time student. H&r free federal   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. H&r free federal Eligible educational institution. H&r free federal   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. H&r free federal S. H&r free federal Department of Education. H&r free federal It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. H&r free federal The educational institution should be able to tell you if it is an eligible educational institution. H&r free federal   Certain educational institutions located outside the United States also participate in the U. H&r free federal S. H&r free federal Department of Education's Federal Student Aid (FSA) programs. H&r free federal   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. H&r free federal There are no income restrictions on the individual contributors. H&r free federal You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. H&r free federal   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. H&r free federal This is a return of the investment in the plan. H&r free federal The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). H&r free federal Earnings and return of investment. H&r free federal    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. H&r free federal The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). H&r free federal Form 1099-Q should be sent to you by January 31, 2014. H&r free federal Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. H&r free federal Adjusted qualified education expenses. H&r free federal   This amount is the total qualified education expenses reduced by any tax-free educational assistance. H&r free federal Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H&r free federal Taxable earnings. H&r free federal   Use the following steps to figure the taxable part. H&r free federal Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. H&r free federal The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. H&r free federal Subtract the amount figured in (1) from the total distributed earnings. H&r free federal The result is the amount the beneficiary must include in income. H&r free federal Report it on Form 1040 or Form 1040NR, line 21. H&r free federal Example 1. H&r free federal In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. H&r free federal Over the years they contributed $18,000 to the account. H&r free federal The total balance in the account was $27,000 on the date the distribution was made. H&r free federal In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. H&r free federal She paid her college expenses from the following sources. H&r free federal   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. H&r free federal   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. H&r free federal Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. H&r free federal Sara figures the taxable part of the distributed earnings as follows. H&r free federal   1. H&r free federal $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. H&r free federal $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. H&r free federal Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. H&r free federal This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. H&r free federal Example 2. H&r free federal Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). H&r free federal   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. H&r free federal   1. H&r free federal $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. H&r free federal $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). H&r free federal This represents distributed earnings not used for adjusted qualified education expenses. H&r free federal Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. H&r free federal For purposes of this allocation, disregard any qualified elementary and secondary education expenses. H&r free federal Example 3. H&r free federal Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. H&r free federal In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. H&r free federal   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. H&r free federal Note. H&r free federal If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . H&r free federal Coordination With Tuition and Fees Deduction. H&r free federal   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. H&r free federal Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. H&r free federal You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. H&r free federal Your basis is the total amount of contributions to that QTP account. H&r free federal You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. H&r free federal If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. H&r free federal ) from all such accounts in order to determine your taxable earnings for the year. H&r free federal By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. H&r free federal Example 1. H&r free federal In 2013, Taylor received a final distribution of $1,000 from QTP #1. H&r free federal His unrecovered basis in that account before the distribution was $3,000. H&r free federal If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). H&r free federal Example 2. H&r free federal Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. H&r free federal His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). H&r free federal Taylor's adjusted qualified education expenses for 2013 totaled $6,000. H&r free federal In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. H&r free federal   1. H&r free federal $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. H&r free federal $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. H&r free federal $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. H&r free federal Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). H&r free federal Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. H&r free federal Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. H&r free federal Exceptions. H&r free federal   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. H&r free federal Made because the designated beneficiary is disabled. H&r free federal A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. H&r free federal A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. H&r free federal Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H&r free federal Made on account of the attendance of the designated beneficiary at a U. H&r free federal S. H&r free federal military academy (such as the USNA at Annapolis). H&r free federal This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. H&r free federal S. H&r free federal Code) attributable to such attendance. H&r free federal Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. H&r free federal ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. H&r free federal Figuring the additional tax. H&r free federal    Use Part II of Form 5329, to figure any additional tax. H&r free federal Report the amount on Form 1040, line 58, or Form 1040NR, line 56. H&r free federal Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. H&r free federal In addition, the designated beneficiary can be changed without transferring accounts. H&r free federal Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). H&r free federal An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. H&r free federal Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. H&r free federal These are not taxable distributions. H&r free federal Members of the beneficiary's family. H&r free federal   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. H&r free federal Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. H&r free federal Brother, sister, stepbrother, or stepsister. H&r free federal Father or mother or ancestor of either. H&r free federal Stepfather or stepmother. H&r free federal Son or daughter of a brother or sister. H&r free federal Brother or sister of father or mother. H&r free federal Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. H&r free federal The spouse of any individual listed above. H&r free federal First cousin. H&r free federal Example. H&r free federal When Aaron graduated from college last year he had $5,000 left in his QTP. H&r free federal He wanted to give this money to his younger brother, who was in junior high school. H&r free federal In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. H&r free federal If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. H&r free federal Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. H&r free federal See Members of the beneficiary's family , earlier. H&r free federal Example. H&r free federal Assume the same situation as in the last example. H&r free federal Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. H&r free federal Prev  Up  Next   Home   More Online Publications