Sec 529 – Five Year Option
A contribution to a qualified tuition account (or for a prepaid tuition contract) qualifies for annual gift tax exclusion ($16,000 for 2022) and, to the extent of the exclusions, is exempt from the generation-skipping transfer (GST) tax.
A contributor may contribute during a single year up to 5 times the annual gift tax exclusion amount to a qualified tuition account and, for gift tax and GST tax purposes, treat the contribution as having been made ratably over the five-year period beginning with the calendar year in which the contribution is made.
As with other gifts to individuals, the contributor may not claim a tax deduction or tax credit for the amounts contributed to the QTP. A distribution from a qualified tuition account or prepaid tuition contract generally is not subject to gift tax or GST tax.
Thus, an individual could contribute five times the annual exemption and a couple twice that amount. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount more than the allowable annual exclusions would revert back to the donor’s estate. No additional gift could be given to the beneficiary of the Section 529 plan for that entire five-year period without triggering a gift tax return filing requirement, and potentially gift tax, unless there is an increase in the annual exclusion amount.
If, in any year after the first year of the five-year period, the amount of the annual exclusion is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made (Prop. Reg. 1.529-5(b)(2)(iv)).
Example - In Year 1, when the annual gift exclusion is $15,000, Paul, who is divorced, makes a contribution of $90,000 to a QTP for the benefit of his child, Chris. Paul elects under section 529(c)(2)(B) to account for the gift ratably over a five-year period beginning with the calendar year of contribution. Paul is treated as making an excludable gift of $15,000 in each of Years 1 through 5 and a taxable gift of $15,000 in Year 1. In Year 3, when the annual exclusion is increased to $16,000, Paul makes an additional contribution for the benefit of Chris in the amount of $8,000. Paul is treated as making an excludable gift of $1,000; the remaining $7,000 is a taxable gift in Year 3. Note: This example is from Prop Reg 1.529-5(b)(2)(v) but updated for the current gift tax allowances. Thus, in this example, the taxpayer would have to wait until years 4 and 5 to make the $1,000 increased contribution.
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