The Internal Revenue Service wants to limit taxpayers’ ability to make creative use of college savings program tax breaks.
The IRS is getting ready to write regulations that will prevent taxpayers from using Section 529 qualified tuition plans to avoid gift taxes, generation-skipping taxes and related taxes, IRS officials write in an advance notice of proposed rulemaking that appears today in the Federal Register.
The IRS intends to give states, state agencies and educational institutions at least 15 months to implement most of the changes that will be proposed, officials write.
But “anti-abuse rules may be applied on a retroactive basis,” officials warn.
In some cases, abuse may arise “if a person contributes a large sum to an account for himself or herself and then changes the [designated beneficiary] to a member of his or her family who is in the same or a higher generation … as the contributor,” officials write. “The contributor’s contributions to his or her own account would not trigger the gift tax because an individual cannot make a gift to himself or herself. The contributor may claim that the subsequent change of [designated beneficiary] to a member of the contributor’s family who is in the same or a higher generation avoids the gift tax under the special transfer tax rules of section 529.”
In other cases, abuse might arise because the IRS now treats contributions to accounts as completed gifts to the designated beneficiary “even though the account owner … may be able to withdraw the money at his or her discretion,” officials write.
The rulemaking notice refers to topics such as the account owner’s liability for any gift or generation-skipping transfer tax imposed in connection with a taxable change of beneficiary; the account owner’s liability for taxes imposed on cash withdrawn from a 529 plan; and special rules that apply in the cases of individuals who contribute to 529 plans for their own benefit.
A copy of the IRS 529 plan notice is available