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Question: I’m trying to save for college for my child. Can you explain what a “529” plan is and how it works in Ohio? Any particular issues or restrictions I should watch out for with this method of college savings?

Tax Partner Dave Baymiller’s answer: A 529 plan is a Qualified Tuition Program and is also referred to as a College Savings Plan.  These plans are established by states to allow for contributions to be made to an account for paying a student’s qualified education expenses at a postsecondary institution. No federal deduction is allowed for the contribution, but no tax is due on the distributions that are used to pay the qualified education expenses. Under the Ohio plan, you are allowed to take an annual state deduction on the Ohio tax return of up to $2000 per beneficiary and any excess is allowed to be carried forward and deducted in future years. So, if you contribute $4000 to the Ohio plans for two beneficiary students during the year, you would be allowed to deduct $4000 ($2000 each) with the remaining $4000 carrying over to the next year. But, you don’t have to contribute to just your resident state plan. Also, just because amounts are in a state plan does not mean that the postsecondary institution needs to be in the same state. Some things that you need to watch out for are: Federal Gift tax issues- If you contribute more than a certain amount in a year per beneficiary, you will want to consider making an election on a timely filed gift tax return to treat the contribution as made over 5 years. Distribution issues- You want to make sure that when amounts are distributed that they are used to pay “qualified education expenses “. Don’t just assume that because the expense relates to college in some way that it is going to be included as qualified. You also want to make sure that you are timing the distributions to cover the expenses in the proper periods. This is a common trap. Excess distributions are subject to not only income tax but also to a penalty. You as the owner of the account or the beneficiary will receive a form 1099-Q that shows the full amount of the distributions during the year as well as the earnings portion of that distribution. You should also be looking for a 1098-T from the institution that has information about the expenses. Don’t ignore them. They need to be reported properly with your income tax filing. If not, you will most likely receive a notice from the IRS with a calculated tax and these are somewhat painful to get resolved. 

Dave Baymiller is a partner in the tax services area with over thirty years of public accounting experience. He practices exclusively in the area of federal, state and local taxation with an emphasis on tax planning and consulting. Learn more about Dave's expertise.