All the warnings that financial institutions give a person about checking with a tax adviser before taking action really are worth heeding. Unfortunately, a Minnesota man learned in Tax Court the impact of taking money from the college savings plans of his children. He would have made a wiser decision by first conferring with a tax preparation business.
Arrangements that allow for education savings in 529 plans have special tax rules. The investment income in these accounts grows with incurring income tax. Individuals do occasionally provide their paid tax preparers with evidence of 529 plan contributions. However, no income tax deduction is allowed for these amounts.
In addition, contributions to 529 plans normally don't create gift tax situations. Tax law permits large first-year contributions to establish the accounts. In subsequent years, contributions must not exceed the annual gift tax exclusion. As long as contributions are within these guidelines, a registered tax return preparer course conveys that no gift tax return is necessary.
The issue regarding 529 plans for most tax preparer jobs involves the tax impact of withdrawals from these accounts. Taxpayers receive Form 1099-Q for 529 plan distributions. Reporting the withdrawn amount on a tax return is necessary to avoid subsequent explanation in response to an IRS inquiry. But, no tax impact is recorded by tax preparer duties with a 1099-Q if the distributions were used to pay for qualified education expenses. The Minnesota man learned that this is the only exception to a taxable event for 529 plan withdrawals.
The Tax Court ruling reveals that the Minnesota man requested funds from three 529 plans established for his children. He planned to use the money for household expenses. His first mistake was that he waited to confer with his wife after he took action. She disagreed with his decision to withdraw funds from the children's college savings plans. The man then informed the custodian of the plans that he no longer wanted the requested distributions. He learned that the transactions cannot be voided.
The Minnesota man then endorsed the distribution checks he received and sent them back to the custodian of the 529 plans. He did not report any taxable income from the transactions because of his redeposit of the funds. The Tax Court ruled that the amounts on Form 1099-Q were correctly reported distributions and that each redeposit constituted new contributions to the accounts. Tax is owed on the reported withdrawals because no qualified education expenses were incurred for these funds.
The court's decision provides an important lesson for tax return preparer education. That is, no do-over is permitted with distributions from tax-qualified plans. People cannot restructure transactions that have already occurred in order to achieve favorable tax results.
Arrangements that allow for education savings in 529 plans have special tax rules. The investment income in these accounts grows with incurring income tax. Individuals do occasionally provide their paid tax preparers with evidence of 529 plan contributions. However, no income tax deduction is allowed for these amounts.
In addition, contributions to 529 plans normally don't create gift tax situations. Tax law permits large first-year contributions to establish the accounts. In subsequent years, contributions must not exceed the annual gift tax exclusion. As long as contributions are within these guidelines, a registered tax return preparer course conveys that no gift tax return is necessary.
The issue regarding 529 plans for most tax preparer jobs involves the tax impact of withdrawals from these accounts. Taxpayers receive Form 1099-Q for 529 plan distributions. Reporting the withdrawn amount on a tax return is necessary to avoid subsequent explanation in response to an IRS inquiry. But, no tax impact is recorded by tax preparer duties with a 1099-Q if the distributions were used to pay for qualified education expenses. The Minnesota man learned that this is the only exception to a taxable event for 529 plan withdrawals.
The Tax Court ruling reveals that the Minnesota man requested funds from three 529 plans established for his children. He planned to use the money for household expenses. His first mistake was that he waited to confer with his wife after he took action. She disagreed with his decision to withdraw funds from the children's college savings plans. The man then informed the custodian of the plans that he no longer wanted the requested distributions. He learned that the transactions cannot be voided.
The Minnesota man then endorsed the distribution checks he received and sent them back to the custodian of the 529 plans. He did not report any taxable income from the transactions because of his redeposit of the funds. The Tax Court ruled that the amounts on Form 1099-Q were correctly reported distributions and that each redeposit constituted new contributions to the accounts. Tax is owed on the reported withdrawals because no qualified education expenses were incurred for these funds.
The court's decision provides an important lesson for tax return preparer education. That is, no do-over is permitted with distributions from tax-qualified plans. People cannot restructure transactions that have already occurred in order to achieve favorable tax results.
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