Technical correction provides a break from penalty

The Job Creation and Worker Assistance Act of 2002 was signed into law by President Bush on March 9, 2002. While the legislation was not targeted to higher education, the new law does contain a technical correction to the 2001 EGTRRA affecting 529 plans and Coverdell education savings accounts.

The correction makes clear that the 10% additional tax on non-qualified withdrawals does not apply to taxable income caused by the reduction in "qualified higher education expenses" for taxpayers claiming the Hope or Lifetime Learning credit. This is a welcome change, because prior to the technical correction a 529 or Coverdell participant could be exposed to the penalty simply by qualifying for the credit. The exception will work much like the exception for scholarship withdrawals, i.e. the earnings portion will be subject to federal income tax but will not incur the 10% additional tax.
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