Illinois law restricts tax benefits to in-state 529

The Illinois Governor has signed a bill that de-conforms state income tax treatment from federal exclusion of qualified withdrawals from a 529 plan beginning in 2002. Illinois taxpayers will have to pay tax on the earnings distributed from out-of-state 529 accounts. Only withdrawals from the Illinois savings and prepaid tuition programs will remain exempt from IL tax.

The law also provides that the earnings portion of rollover contributions to the IL Bright Start 529 savings plan will not be deductible (the principal portion will be deductible). Non-rollover contributions to Bright Start remain fully deductible against IL income (the deduction does not apply to the College Illinois prepaid program).

Finally, the law now provides that contributions to either of the IL 529 plans will be excluded from consideration in determining eligibility for IL-funded student financial aid programs.
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