It’s September and thoughts turn to tuition.  The Pension Protection Act of 2006, passed and signed in August, included a provision permanently extending the federal income tax benefits of 529 plans. 

Under Section 529 of the Internal Revenue Code, a person may establish an account with a qualified tuition program to save for a beneficiary’s college tuition, room, board, books, supplies, and equipment.  The account income, ordinary and capital gains, is tax exempt and distributions for appropriate expenses do not create income for the account beneficiary.  Most states also provide favorable tax treatment for the programs.  Many restrictions apply.

But the federal income tax exemption was scheduled to sunset on December 31, 2010.  As a result, many taxpayers were hesitant to create accounts when they could not be sure of the income tax consequences.  Now the exemption is permanent. Section 529 Plans can be used to leverage gifting and save income taxes.

But be careful.

The Act also gives regulatory authority to the IRS to prevent abuses of qualified tuition programs.  Some planners have been promoting the ability to increase gifting by changing beneficiaries on accounts, or using the accounts for retirement purposes.  The IRS will probably close these “loopholes.”

But for those interested in using qualified tuition programs for legitimate purposes, the tax exemption creates a powerful saving vehicle. If you would like more information, contact:  Christopher Anderson (816.472.3117), John Dooling (314.259.4743), Jonathan Igoe (314.342.8019) or one of the other attorneys in the Tax, Employee Benefits and Trusts and Estates Practice Group.

Please feel free to pass this on to any colleague or client who may be interested in this information.