Section 529 Plans: Filing Tax Returns and Reporting Contributions
Section 529 is a federal code section under the Internal Revenue Code. It's not surprising, then, that the IRS has some input into documentation and reporting requirements. Always keep in mind that the IRS is not in the business of making the laws or implementing policy (Congress is supposed to do that); its job is to enforce the laws that are on the books.
Reporting contributions: Income Tax versus Gift/GST Tax
Very little in Section 529 qualifies as easy to understand—but this does. There is no current federal income tax deduction for contributions made into a Section 529 plan. You don't need to disclose to the IRS that you have a Section 529 plan on your income tax return (your Form 1040, 1040A, or 1040EZ). It doesn't matter how much money you earn; if you have the money to put into a plan, you can contribute it, no matter your income.
Finally, there's no limit to how much you can contribute in a single year or how many plans you can fund. If you have six potential students you want to put through college, you can. You can even fully fund a plan, any plan, and as many plans as you want, in one lump sum, up to the stated plan limit, in a single year, although you may have gift and/or Generation-Skipping Transfer (GST) tax considerations.
The rules regarding reporting contributions for gift and GST tax returns are a bit more complex, and you may decide early on to seek professional advice. Smart choice! However, here's a quick overview:
- If you make gifts of less than $13,000 in 2009 to any one person (including the contribution you make into a Section 529 plan for that person), even if that gift isn't to your child, you don't need to file a Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax return.
- If you make contributions into a Section 529 plan of between $13,000 and $65,000 for a single designated beneficiary, you need to file a Form 709 for this year, and for the next four years if you make any additional gifts in those years. In each year, you show the total amount of the gift and the amount of the gift eligible for annual exclusion status. If the amount that you give is less than $65,000, then you will report one-fifth of the total amount in each year. You make this election on the tax return itself, which is due at the same time as your income tax return. You need to make the election only once, in the first year; in the subsequent four years, if you don't make other taxable gifts, you're not required to file a Form 709 for those years. If you're gift splitting with your spouse, both of you need to file a Form 709 in the first year, and both of you need to make the election for spreading the gift over five years.
- If you make contributions into a Section 529 plan in excess of $65,000 in any single year for any single beneficiary—or $130,000 if you can split the gifts with your spouse —you can still elect to spread $65,000 over five years. The balance of the amount over $65,000, though, is entirely taxable in the year the gift is made. Be certain to make the proper election on your gift tax return to get the five-year treatment.
- When you contribute an amount that's in excess of the annual exclusion amounts to a 529 plan for a beneficiary who isn't your child, you need to know where this person fits on the generational scale, for Generation-Skipping Transfer Tax (GSTT) purposes. If the person is your relative, this is easy to figure out " your children's children constitute one generation skipped, your niece's child is one generation skipped, and so on. If the designated beneficiary is not related to you, the generations are calculated by using your age as the benchmark as follows:
- For someone born not more than 12 and a half years after you, he or she is considered to belong to your generation and is therefore not a skip person.
- For someone born between 12 and a half and 37 and a half years after you, he or she is considered to belong to the same generation as your children and is therefore not a skip person.
- For someone born between 37 and a half and 62 and a half years after you, he or she belongs to the same generation as your grandchildren. Gifts made into a Section 529 plan also qualify for GSTT treatment.
Whenever you make a gift larger than your annual exclusion amount to anyone who is more than one generation removed from you, that gift becomes subject to the gift tax and the GSTT rules.