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Recent Federal News
IRS says bonus paid to open a 529 is a 1099 event
(March 15, 2013) - In PLR 201310043, the IRS informs a financial services company that an account opening bonus of $600 or more paid by the company into the 529 account of a customer must be reported to the customer on Form 1099.
The IRS views the bonus payment as a two-step transaction: (1) payment of cash to the customer (income subject to 1099 reporting), followed by (2) customer funding of his or her 529 account.
A similar type of bonus paid to a customer opening an IRA is not subject to 1099 reporting. The IRS distinguishes an IRA from a 529 plan and cites statutory authority for exempting the IRA bonus from 1099 reporting requirements.
H.R. 529 changed and re-introduced in Congress
(February 8, 2013) - H.R. 529 has been re-introduced in Congress by Rep. Lynn Jenkins (R-KS) but consists of only two of the changes that were included in the bill introduced in the prior Congress.
H.R. 529 would provide an expansion of the Saver's Credit to include contributions to 529 plans, and it would allow employers to make up to $600 per year in tax-free contributions to the 529 account of each eligible employee.
A separate bill will be introduced to increase the number of investment changes from once to four times in a year, and to expand the definition of qualified higher education expenses to include computers and computer technology.
Presumably, the second bill has a better chance of adoption even if H.R. 529 is not passed, since its tax revenue impact is modest.
Congress votes to keep higher-education tax incentives
(January 2, 2013) - The bill (H.R. 8) passed by Congress this morning to avert the "fiscal cliff" preserves essentially all of the higher-education tax incentives enacted in recent years.
By making the 2001 tax changes permanent--most were scheduled to expire on December 31, 2012--the Coverdell education savings account retains its usefulness for K-12 expenses and allows up to $2,000 in annual contributions.
The provisions of the 2001 law affecting 529 plans, including tax-free treatment for qualified withdrawals, had already been made permanent by a 2006 law and were not at risk of expiring.
H.R. 8 increases the income and capital-gains tax rates on single taxpayers with more than $400,000 in taxable income and for couples over $450,000. These changes make 529 plans even more appealing for high-income families exposed to the higher tax rates.
The bill extends the $2,500 American Opportunity Tax Credit for five years (through 2017) and extends the above-the-line deduction for tuition and fees through 2013.
The extension of the tuition and fees deduction was made retroactively, as that incentive had already expired at the end of 2011.