So years ago you set aside money in a 529 plan to help pay for a child’s education. A smart move – not to mention commendable. But now the kid decides a high school education is enough and opts not to go to college. Or better, she or he gets a full ride at an esteemed institution and doesn’t need all the money. So being the philanthropic individual (or couple) you are, you decide to donate the money to the college where you earned your degree.
Not so fast. There’s a problem. Federal tax law doesn’t favor your philanthropic intentions. Under current IRS rules, a taxpayer can’t just donate a 529 account to an educational institution or other charity, even when it is earmarked as scholarship funding. At the heart of the issue is your designated beneficiary, that high school graduate. Section 529 requires any new beneficiary to be a family member of the old beneficiary. There’s no exemption for charitable organizations – despite the fact that charities can set up 529 plans themselves without designating or specifying beneficiaries. More troublesome is that the donation is treated as a distribution to the account owner – that would be you – and subject to tax and a 10 percent penalty on the earnings portion.
So how do you donate a 529 account and claim a charitable deduction for the donation? To get the funds to your old college, or another charity, you as owner of the account would take the funds back, subject to tax – earnings will be taxed as ordinary income – and the 10 percent penalty on the earnings. Then you would donate the remaining amount. You can then claim a charitable contribution for the actual funds transferred.
Contact us for more information. As always, we’re here to help you achieve your financial goals – and to do so in the most tax-wise ways.