529 Plan Closed Account

Forum|Forum|3 years ago
March 12, 2023
1 reply
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Hi all, question on closing the 529 plan and taking the final withdrawals. So we had money left after using it for child's college. The earnings portion was about $20,000. My question is on the state of Illinois tax return. As the owner of the 529, our deposits over the years when we were contributing to the plan were deductible in Illinois but now the earnings portion I suspect we have to pay state taxes on. There is a question on the Illinois tax return about income received from 529s. Since that amount is already included in my federal return do I need to add it anywhere on the Illinois return? There are two sections that are confusing pertaining to the distribution and income for 529s. Any help is appreciated. Thanks

hbl3973

Alumni - Champ

BudgetNuts,

The Bright Start Tax Center underscores:

"Keep in mind – if funds are spent on non-qualified expenses, you’ll pay taxes on your earnings, plus an additional 10% federal tax. And the amount of any deduction previously taken for Illinois income tax purposes is subject to recapture when withdrawn for non-qualified purposes or if assets are rolled over to a non-Illinois 529 plan. Other states offer similar benefits to their residents, so if you live outside of Illinois you’ll want to understand your own home state plan and its benefits and features."

so you do need to check that Yes box and that leads to IL Schedule M line 9. The instructions for that line read:

"Line 9 — Recapture of deductions for contributions to college savings and ABLE plans withdrawn for nonqualified expenses or refunded
If you withdrew funds or received a refund of contributions from a qualified tuition program or ABLE program, the funds were not used for qualified expenses at an eligible institution, and the withdrawal or
refund did not result from the death or disability of a beneficiary of the program, include the amount equal to the amount of deductions you claimed for contributions related to the nonqualified withdrawal or
refund amount. Enter the smaller of
- the amount of deductions you claimed for amounts contributed to an Illinois college savings plan or Illinois ABLE plan, minus any amount recaptured on Line 7 for this year and any deductions recaptured in prior years for that plan, or
- the refund or amount you withdrew during the tax year that was not used for qualified expenses in an eligible institution plus any refund of contributions."

It is not clear whether you closed that 529 account in the same tax year as the one in which you made your last qualified withdrawal. If it was in a later year, then Box 3 of the 1099-Q is the remaining basis and is the amount to use for the first bullet point. Box 1 would most likely be the amount for the second bullet point in your situation. Since Box 1 = Box 2 + Box 3, the amount in Box 3 would be the amount that is entered on that Line 9.

If the account was closed in the same year, you'll need to split out the remaining basis from Box 3 and the qualified withdrawal from Box 1.

Hal_Al

Level 15

Note that the IL tax on the "recapture" of the previous year deductions is in addition to the tax on the earnings portion of the distribution, that transfers from the federal return. It's not double taxation. It's tax on two different pieces of "income". It works this way in most other states, too.