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529 News

Recent Federal News

Court case rules on Sec. 529 room and board

(December 1, 2009) - In Venet v. Commissioner, T.C. Memo. 2009-268 (Nov. 24, 2009), the U.S. Tax Court was faced with determining the amount of room and board, as defined under Sec. 529, incurred by taxpayer's daughter attending Michigan State University in 2006. The taxpayer was looking to avoid the 10 percent early distribution penalty on an IRA distribution. The penalty is waived to the extent the taxpayer or taxpayer's spouse or child incurs Sec. 529 qualified higher education expenses.

Although they did not keep detailed records of room and board expenses, the court was satisfied on the basis of credible testimony that the taxpayers provided their daughter with $575 per month for rent, $100 month for utilities, and $100 per month for food ($775 per month total) in the year at question (2006). However, such expenses would be limited to the amount included by MSU in its cost of attendance for purposes of the penalty waiver. That particular figure was not stated in the case.

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IRS announces 2010 inflation adjustments

(October 16, 2009) - The IRS has published its 2010 inflation adjusted figures for many limitations found in the tax code. There are no changes from the 2009 figures for the kiddie tax unearned income threshold, the American Opportunity/Hope/Lifetime Learning credits, or the gift tax annual exclusion amount. The income limits for the education bond exclusion (for certain U.S. savings bonds) is increased slightly in 2010 with a MAGI phase-out range of $105,100 - $135,100 for married taxpayers filing jointly and $70,100 - $85,100 for other taxpayers.

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Treasury issues report calling for 529 improvements

(September 9, 2009) - The U.S. Treasury Department has issued a report prepared for the White House Task Force on Middle Class Working Families titled An Analysis of Section 529 College Savings and Prepaid Tuition Plans. The report provides an explanation of 529 plans and summarizes findings of Treasury's investigation of the 529 landscape and issues surrounding the structure and use of 529 plans.

In its report, Treasury makes five recommendations to improve the effectiveness of 529 plans:

1. Provision of age-based index funds. Most, but not all, 529 savings plans offer age-based investment options. Of those that do, slightly more than half utilize index funds, while the others utilize actively-managed funds. Treasury believes that age-based index funds should be made available in all 529 savings plans.

2. Eliminate home-state bias. Many states currenlty provide special incentives to use the in-state 529 plan, offering state tax deductions, state financial aid preference, and other benefits. Treasury feels that states restricting these benefits to the home-state 529 plan is unfair and dampens competition among the plans. States should open up these benefits to their residents using any 529 plan, and adjust the benefits as needed to prevent a budget problem.

3. Per beneficiary contribution limits. Treasury is concerned that accounts can theoretically be established in multiple states for the same beneficiary and thereby allow grossly excessive amounts to be accumulating tax-deferred. To prevent this, Treasury recommends that an overall cap be established, and that once the principal portion of distributions on a cumulative basis exceed that cap, further distributions be considered nonqualified and become subject to a penalty.

4. Improved transparency. Treasury would like to see a standard reporting format for historical investment returns in 529 plans such that they can be displayed on a central website. Better statistics gathering on plan usage is also recommended.

5. Improved monitoring and compliance. "To reduce the potential for abuse, Congress and the states should work together to strengthen compliance and monitoring of Section 529 accounts and their disbursements."

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