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Military Tax Act eliminates 10% penalty for academy students

(November 15, 2003) - President George Bush signed the Military Family Tax Relief Act of 2003 (HR 3365) on November 11. Among other items, the Act provides that attendance at a U.S. military academy will be treated as a scholarship for purposes of the 10% penalty on nonqualified withdrawals from a 529 plan or Coverdell ESA. The value of the no-cost education (as determined under the U.S. military code) can be withdrawn penalty-free from a 529 plan or CESA, although the earnings portion will continue to be taxable.

The change is effective beginning with the 2003 tax year.

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