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529 College Savings Plan
 If you have a child (or a grandchild) who is going to attend college in the future, you have probably heard about qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis.
You don't get a federal deduction for the contribution, but the earnings on the account aren't taxed while the funds are in the program. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without tax consequences.
The contributions you make to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the annual gift tax exclusion, which is $12,000 for 2007. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account ratably over a five-year period starting with the year of the contributions. Thus, assuming you make no other gifts to that beneficiary, you could contribute up to $60,000 for each beneficiary in 2007 without gift tax. (In that case, any additional contributions during the next four years would be subject to gift tax, except to the extent the exclusion amount increases.) You and your spouse together could contribute  $120,000 per beneficiary, subject to any contribution limits imposed by the plan.
Distributions from the program are tax-free if they don't exceed the student's qualified higher education expenses. These include tuition, fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.
Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax will also be imposed.
Important Tax Law Change for Indiana
 For taxable years beginning after December 31, 2006, Indiana allows a tax credit for contributions made to an Indiana CollegeChoice 529 Education Savings Plan. The amount of the credit is the lesser of 1) 20% of the amount contributed to the 529 plan, 2) $1,000 or 3) the amount of the taxpayer's adjusted gross income tax liability reduced for other credits. Any unused credit cannot be carried back, carried forward or refunded.
The Indiana Department of Revenue does not currently define how long the money has to remain invested. However, under Senate Bill 500, a taxpayer will not be eligible for the tax credit if the CollegeChoice 529 Plan account is terminated within the twelve (12) months after the account is opened. The initial contribution can be as low as $50.
EXAMPLE: A taxpayer's Indiana tax liability for 2007 is $1,000. The taxpayer has made prior tax payments in 2007 to Indiana via withholding or estimated payments of $1,000. Taxpayer has contributed $400 to Indiana colleges in 2007 and is eligible to claim a $200 College Credit. Taxpayer made a $5,000 contribution to an account of the CollegeChoice 529 Education Savings Plan for 2007 so that he is entitled to a $1,000 529 Plan Credit. On Taxpayer's 2007 adjusted gross income tax return, the $200 College Credit is applied to reduce Taxpayer's tax liability from $1,000 to $800. Then $800 of the 529 Plan Credit is applied against the $800 balance of Taxpayer's tax liability to reduce this tax liability to $0. The remaining $200 of 529 Plan Credit is not usable. Because the combination of the College Credit and 529 Plan Credit have reduced Taxpayer's liability to $0, Taxpayer has overpaid his 2007 taxes by $1,000 and is entitled to a $1,000 refund. The Taxpayer is not entitled to any refund, carryback or carryforward of the $200 unused 529 Plan Credit.
NOTE: The above example holds true even if a contribution is made one day and qualified distributions from the plan are made the next day, as long as the account is not terminated within 12 months after the account is opened.
If you would like to further discuss how the qualified tuition program might help to meet your child's future college costs, please give us a call or click the Email RBSK button below and Jean Ralston (Batesville office) or Bob Blankman (Greensburg office) would be glad to assist you.
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