Bright Start 529 Tax Benefits

Tax-Free Withdrawals

Withdrawals for qualified higher education expenses are generally free from federal and state income tax.

Qualified Higher Education Expenses (Source: IRS Publication 970 – January 2021)

These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.

1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.
1. Tuition and fees.
2. Books, supplies, and equipment.
2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.
3. Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.
1. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

2. The actual amount charged if the student is residing in housing owned or operated by the school.

   You may need to contact the eligible educational institution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)
5. The expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
6. No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan (see chapter 4) any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.

Half-time student. A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.

Qualified Elementary and Secondary Education Expenses

These are expenses for no more than $10,000 of tuition, incurred by a designated beneficiary, in connection with enrollment or attendance at an eligible elementary or secondary school.

*CAUTION – Illinois Qualified Expenses do not include expenses for:

• tuition in connection with the Beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school. The amount of cash distributions for such expenses from all 529 qualified tuition programs with respect to a Beneficiary shall, in the aggregate, not exceed $10,000 during the taxable year.
• If a withdrawal is made for such purposes it may be a Federal Qualified Withdrawal and not be included in income for federal and Illinois purposes, but if an Illinois income tax deduction was previously claimed for Contributions to the Account all or part of that deduction may be added back to income for Illinois income tax purposes.

Please consult with your tax advisor.

The earnings portion of a nonqualified withdrawal may be subject to federal and state income taxes, a 10 percent federal tax penalty, and Illinois may recapture prior tax deduction benefits. Please consult your tax advisor.

View IRS Publication 970 for additional details.

Gift and Estate Tax Treatment

Contributions to an account are considered a gift from the contributor to the designated beneficiary and are generally excludable from the account owner’s taxable estate. Amounts in an account at the death of the beneficiary are includable in the designated beneficiary’s estate.

An account owner’s contributions to an account are eligible for the annual gift tax exclusion, which is currently $17,000 per donee. 529 plans also allow for a special gift tax exclusion election. In general, this rule allows you to contribute up to $85,000 for each beneficiary in a single year without federal gift tax consequences—provided that you make no other gifts to the beneficiary in the same year or in any of the succeeding four calendar years. This election needs to be made on a federal gift tax return. Under this rule, your contributions are subject to being added back into your taxable estate in the event of your death within the five-year period. You should consult your tax advisor regarding your situation.²

View IRS Form 709 Instructions for additional information.