Sent via email

 

September 30, 2015

 

 

Re:      Combining College Savings of Iowa assets of Participants (husband and wife) with same Beneficiaries

 

Dear :

 

Recently, the Department received your letter regarding the college savings of Iowa plan. In your letter, you state the following facts.

 

Facts Set Out in Your Letter:

 

You and your wife have been making contributions for the benefit of your seven grandchildren to the College Savings of Iowa since 2003.  While you feel that you have several years of life left, the fact is you may not live long enough to complete your goal of $500 per year per grandchild for the first twenty years of their lives. You decided to get funds together to “prefund” all accounts and thus treat all children equally without involving detailed trust and/or will instructions.  This was done with the 2015 contributions completed on March 2, 2015 within the contribution limits.  You still have one contribution of $300 in 2016.

 

After checking with the College Savings of Iowa people you found you only need to complete a change of ownership form for each beneficiary to transfer the assets from one Participant to another and then delete the transferring Participant.  The end result would be one participant with the same seven beneficiaries, a much simpler situation. 

 

Question:

 

(1) Are there any income tax consequences to combining the accounts this (or any) year?

(2) Does the possibility exist of disallowance of the 2015 contributions deduction for the deleted participant even though the contributions were made prior to the combining of the accounts?

 

Answer:

 

Iowa Code section 12D.65) provides:

 

A participant may transfer ownership rights to another eligible individual, including a gift of the ownership rights to a minor beneficiary.  The transfer shall be made and the property distributed in accordance with rules adopted by the treasurer of state or with the terms of the participation agreement.

 

Iowa Admin. Code r. 781—16.9 provides:

 

The participant is the initial owner of the account established under an Iowa 529 plan and, as such, has the exclusive right to cancel the participation agreement or change the designated beneficiary in accordance with these rules and the applicable program description.

 

16.9(1)  A participant may transfer the participant’s current ownership rights in an account to another eligible individual or to a minor beneficiary.  To do so, the participant shall complete the appropriate form.

 

Iowa Code section 422.7(32) provides:

 

The term “net income” means the adjusted gross income before the net operating loss deduction as properly computed for federal income tax purpose under the Internal Revenue Code, with the following adjustments:

…

32. a.  Subtract the maximum contribution that may be deducted for Iowa income tax purposes as a participant in the Iowa educational savings plan trust pursuant to section 12D.3 subsection 1, paragraph “a”.  For purposes of this paragraph, a participant who makes a contribution on or before the date prescribed in section 422.21 for making and filing an individual income tax return, excluding extensions, may elect to be deemed to have made the contribution on the last day of the preceding calendar year.  The director, after consultation with the treasurer of state, shall prescribe by rule the manner and method by which a participant may make an election authorized by the preceding sentence.

 

b.  Add the amount resulting from the cancellation of a participation agreement refunded to the taxpayer as a participant in the Iowa educational savings plan trust to the extent previously deducted as a contribution to the trust.

 

c.  Add the amount resulting from a withdrawal made by a taxpayer from the Iowa educational savings plan trust for purposes other than the payment of qualified education expenses to the extent previously deducted as a contribution to the trust .

 

Iowa Code section 422.7(33) provides:

 

Subtract, to the extent included, income from interest and earnings received from the Iowa educational savings plan trust created in chapter 12D.

 

Iowa Admin. Code r. 701—40.53(1) provides:

 

Effective with contributions made on or after July 1, 1998, an individual referred to as a “participant” can claim a deduction on the Iowa individual income tax return for contributions made by that individual to the Iowa educational savings plan trust on behalf of a beneficiary. 

 

Iowa Admin. Code r. 701—40.53(3) provides in part:

 

If a participant cancels a beneficiary’s account in the Iowa educational savings plan trust and receives a refund of the funds in the account made on behalf of the beneficiary, or if a participant makes a withdrawal from the Iowa educational savings plan trust for purposes other than the payment of qualified education expenses, the refund of the funds is to be included in net income on the participant’s Iowa individual income tax return to the extent that contributions to the account have been deducted on prior state individual income tax returns of the participant.

 

 

Neither the Department’s code nor rules impose any recapture fees or penalties for transferring ownership, and the code section which implements the IA 529 plan makes a distinction between transferring ownership, canceling the account, or withdrawing money from the account for ineligible purposes, the last two situations which are covered by the Department’s code and rule.  Therefore, using the facts you provided, there are no income tax consequences for Iowa purposes for transferring the account from one participant to another, as long as the transfer is the type of transfer contemplated by Iowa Code section 12D.66) and Iowa Admin. Code r. 791—16.9. 

 

According to Iowa Admin. Code r. 701—40.53(1), the participant who made the contribution is the participant that can claim the deduction.

 

I hope this information has been helpful to you. Please remember that this letter is an informal opinion based only on the facts you provided, and on the current law. In the future the Department could take a position contrary to that stated in this letter. Any written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.24 is not binding upon the Department. If you have any additional questions regarding this matter please do not hesitate to contact me.

 

 

Sincerely,

 

 

 

Theresa A. Dvorak

Policy Section

Taxpayer Services and Policy Division

Iowa Department of Revenue

(515) 281-3194

theresa.dvorak@iowa.gov