More liberal treatment for computer purchases and college refunds have enhanced state-sponsored Section 529 college savings plans due to recent federal tax legislation.
Most states offer tax-advantaged savings plans to allow parents, grandparents, and others to save and invest for a child’s higher education while obtaining some current and future tax breaks to enhance the savings effort. The plans allow tax-free use of principal and earnings for tuition, board, and certain college expenses.
Until this year, the rules allowed the use of funds for the purchase of a computer only if a college specifically required that the student possess a computer as a condition of enrollment. That restriction no longer applies: funds can be used to purchase a computer, software, internet access, and related services as long as they are used by the student while he or she is enrolled in school. It no longer matters whether the school requires a computer or not.
Until now 529 plan account owners were at odds over what to do with money refunded from an eligible higher education institution when the expense related to the refund was originally paid with funds withdrawn from a plan account.
The new tax law says it is OK to re-contribute the refund to a 529 plan account. The money can go into the same account from which it was withdrawn or into another college savings account, as long as the original student is a beneficiary of the account. Some restrictions apply: the refund deposited cannot exceed the amount of the original distribution, and the money has to be put into the 529 account within 60 days of the date of the refund. If those conditions are met, there won’t be any federal income taxes or penalties on earnings that were withdrawn and then refunded.
However, some states that offer a tax deduction to account owners who make contributions to 529 plans, such as New York, may require the recapture of the tax benefit by having the taxpayer report the amount deducted as current income.