CARL WATTS & ASSOCIATES

July 23, 2012

Washington DC
tel/fax 202 350-9002
If you are considering going back to school or making plans to pay for your children education, there are several options out there for you.

A Qualified Tuition Program (QTP), also called a “529 plan”, is designed to finance a student’s education at an eligible educational institution.
QTP’s are tax favored programs established by a state, and there are many states which offer such programs. Any state government or educational institution in which you are interested can tell you whether or not they participate in a QTP.

Whether you participate in a QTP for yourself or for the benefit of your children, the contributions you make to the plan are after-tax dollars.

After-tax dollars means money that you earned, paid income tax on it, and then deposited it into some kind of account, in our case a QTP. Therefore contributions made to a QTP are not deductible on your Federal tax return.

So how much money can you contribute with a QTP? As a rule, contributions cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary; also there are no income restrictions on the individual contributors.


Qualified education expenses, or rather adjusted qualified education expenses, include:

Tuition;

Reasonable costs for room and board;

Mandatory fees;

Computer technology;

Supplies and books.

And exclude:

Any tax-free part of scholarships and fellowships;

Pell grants;

Employer-provided educational assistance;

Other tax-free payments.
Qualified Tuition Plans
When you receive benefits or distributions from a QTP you should get an IRS Form 1099-Q.

Form 1099-Q details how much distribution you receive (Box 1), what portion of that amount is recorded as earnings on the distribution (Box 2) and how much was the basis or return on investment (Box 3).

If your total qualified education expenses are more or equal the distribution amount, then no amount of your distribution has to be included in your taxable income.

If your qualified education expenses are less than the distribution amount, then some of your earnings will be taxable income. The amount in box 2, the earnings part of your distribution, is the amount that becomes taxable income proportionate to the amount that you paid less for the qualified education expenses. For instance if your distribution was $10,000 and your qualified education expenses only $8,000, then a fifth of your earning amount (Box 2) is taxable income. There is also a 10% penalty you have to pay for that amount as well.

All in all, a QTP is a good way to finance a student’s education, but it is not the only one, so check one of our next newsletter and see what other options are there.