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Author: leoline Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121444  
Subject: 529 withdrawals Date: 6/6/2009 4:39 PM
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Hello,

I've been trying to figure out what taxes may be due on 529 withdrawals when a plan is closed. Am I correct in thinking that no federal taxes or 10% penalties are due on the money that was contributed? Only on the earnings from that money? So that if there are no earnings, then no taxes or penalties are due?
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106220 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 4:49 PM
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Am I correct in thinking that no federal taxes or 10% penalties are due on the money that was contributed? Only on the earnings from that money? So that if there are no earnings, then no taxes or penalties are due?

Correct. See Chapter 8 of Pub 970 for the details. If the state gave some sort of tax break on the contributions you'll need to check those rules also.

Phil

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Author: leoline Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106221 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 4:53 PM
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Thanks. My state did give a tax break on the last 2 years contributions, how would I check out what might be due to them? Would I simply declare it on the next state tax return, and have it included in my income for the year?

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106222 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 5:06 PM
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My state did give a tax break on the last 2 years contributions, how would I check out what might be due to them? Would I simply declare it on the next state tax return, and have it included in my income for the year?

Check the state instruction booklet. Most states start with Federal AGI and have a section for "Additions to Federal AGI." That's where you'd find it if your state's return is organized that way.

Phil

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Author: leoline Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106223 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 7:27 PM
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Thank you! I think I found it, following your pointer:
(quote)

You must add back to federal taxable income any amounts previously deducted and were not used to pay for the qualified higher education expenses of the designated beneficiary, unless the withdrawal was made without penalty under section 529 of the Code due to the death or permanent disability of the designated beneficiary.

So, since my state only allowed deductions starting in 2006, I believe I need to dig out my 2006, 2007 and 2008 state tax returns, find the amounts deducted on each of these, then add all of those amounts together, then add the total to my federal AGI when I file 2009 taxes. Does that sound correct?

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106224 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 8:11 PM
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So, since my state only allowed deductions starting in 2006, I believe I need to dig out my 2006, 2007 and 2008 state tax returns, find the amounts deducted on each of these, then add all of those amounts together, then add the total to my federal AGI when I file 2009 taxes. Does that sound correct?

That sounds about right. The only thing to double check: It's weird, but on the Federal return any taxable distributions go to the beneficiary, not the donor. Make sure that the income goes on the right state return.

Phil

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Author: leoline Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106225 of 121444
Subject: Re: 529 withdrawals Date: 6/6/2009 9:27 PM
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It's weird, but on the Federal return any taxable distributions go to the beneficiary, not the donor. Make sure that the income goes on the right state return.

I don't understand this, sorry?

The beneficiary is too young to hold a job so has no income and no tax returns to file at all. The only tax returns would be my federal and state ones.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 106226 of 121444
Subject: Re: 529 withdrawals Date: 6/7/2009 6:00 AM
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It's weird, but on the Federal return any taxable distributions go to the beneficiary, not the donor. Make sure that the income goes on the right state return.

The beneficiary is too young to hold a job so has no income and no tax returns to file at all. The only tax returns would be my federal and state ones.


Like I said, it's weird. At the Federal level the only possible tax effect of a 529 distribution is additional income on the beneficiary's return. We've already established that in your case there is no effect at the Federal level.

It seems your state offers some sort of tax break to the donor when contributions are made and wants some sort of recapture if the distribution isn't used for qualified education expenses. I don't know who the state wants that from (the donor or the beneficiary), but the instructions should tell you.

If it turns out to be the beneficiary, then it could create a filing requirement at only the state level. For that issue you go back to the "Who Must File?" part of the state instructions.

Phil

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