Contributions to the Michigan MESP 529 plan are calculated in TurboTax with a deduction up to $10000, but the allowable deduction should be reduced by distributions?

The Michigan state tax calculation starts with federal adjusted gross income (AGI) and then has the following additions and subtractions related to a Michigan Education Savings Program (MESP):

 

Additions:

• Withdrawals from an MESP if the withdrawal was not a qualified withdrawal as provided in the MESP.  You can exclude from this addition any amount that represents a return of contribution for which no deduction was claimed in any prior tax year.

Subtractions:

• Contributions to an MESP (up to $5,000 single, $10,000 for married filing jointly).
• Any part of a qualified withdrawal from an MESP account included in federal AGI.

 

 

• Any part of a qualified withdrawal from an MESP account included in federal AGI.

I contributed 10000 to an MESP and withdrew 20258 in qualified expenses.   How do I report this on Michigan State tax return?  Is my AGI reduced by 10258 based on these entries?

I have almost the same question:

We contributed 5000 for each of my children to a total of $10000,  one of the children was in college (freshman). We used his MESP account to pay for tuition + room and board so we took a 29.000 withdrawal from his MESP account.

How do we report it? I added the 10000 as contributions but there is a line later asking for the withdrawals from MESP and I am not sure if I should add that amount here or not (reading the instructions in the MI State brochure) 

It seems to me that we can only deduct the $5000 contribution from the other account from which there was no distribution. Is this correct? If we cannot deduct the contributions to this account ( from which we will be taking money out every semester in order to pay for college) should we contribute $10000/year to the minor sibling account? In other words, are we not getting a tax advantage anymore once the child goes to college and starts withdrawing money from his MESP?

Thank you for your time and assistance.

Did you ever get a response to this question? I am in a similar situation with three children, one in college. Is the "account" specific to each child or is it one big "account", so that my withdrawal this year for the college student essentially negates the amount I contributed to the younger children's accounts.

According to the MO-1040 Instructions for line 17 (Subtractions from income), you should "compute the contributions, withdrawals, and rollovers separately for each account."  So withdrawals from one child's account do not affect contributions to accounts for your other children.

 

 

 

@MichiganMom71

Want to check on how I can handle the below -

• Any part of a qualified withdrawal from an MESP account included in federal AGI.

If in 2020 CY, I used funds from my federal AGI to contribute $2000 to an MESP account and also withdrew $1000 from the same MESP account for college tuition,  on Michigan Schedule 1 can I add $2000 to line 17 and also add $1000 to line 21?   My thinking is the $2000 contribution was included in my federal AGI and therefore the $1000 withdraw can be deemed included in my Federal AGI. 

The 529 withdrawal was probably not included in your federal AGI, if you also entered tuition expenses on your federal return to offset it.

 

On your MI return:

1. The $1,000 distribution from your MESP account should show on line 8 of Schedule 1 as an addition to income; and
2. The $2,000 contribution to the MESP account would show on line 17 of Schedule 1 as a subtraction from income.

 

@tdlloyd25

I think TurboTax is screwed up.

 

As DavidS127 says, the Michigan state return starts with Federal AGI - and the Federal AGI as prepared by TurboTax does NOT include any portion of qualified withdrawals, so why does TurboTax then go and put the entire qualified withdrawal as a subtraction to income in the preparation of the Michigan state return?

 

For my last two filings, 2019 & 2020, I got a letter from the Michigan Treasury stating that they had to correct my return, removing the MESP qualified withdrawal from the subtractions that TurboTax is preparing/entering.  And I can see the same thing happening in TurboTax as I prepare my 2021 return. And for all 2019 - 2021 returns the TurboTax error check has not caught this issue.

 

I have gone through all the questions multiple times to ensure I am not answering anything incorrectly, or entering any incorrect data, I am going to have to go into the Forms mode and manually correct the MI Schedule 1 to remove the MESP qualified withdrawal from the Schedule 1 subtractions that TurboTax is preparing.

 

If anyone can explain to me where I might be making a mistake in my entries, and that TurboTax is actually acting properly, please let me know - otherwise, I am proceeding with the manual adjustment in Forms mode.

 

Thanks!

The reason the MESP 529 is showing as a subtraction in your return is that it is showing as income in your AGI.   Michigan return is subtracting it out so that you do not pay taxes on the MESP 529 funds.  To see what I am talking about and to remove the subtraction if you want follow these steps:  

 

• Go into your State return and click on Edit.  On the next screen
• Click on the "Start" or "Edit" button next to Income
• Answer the questions on each screen and continue until you come to a screen that says "Here's the income that Michigan handles differently" 
• Scroll to Education and 
• Click on the "Learn More" button next to "Education Savings Program Withdrawals".   It states:

 

A qualified withdrawal is any amount you take out from a Michigan Education Savings Program, MI 529 Advisor Plan and/or Michigan ABLE Account to pay for qualified higher education expenses. Qualified higher education expenses include tuition, fees, supplies, certain room and board costs, books, and equipment required for college enrollment or attendance.

If any amount of a qualified withdrawal was included in your gross income you should enter that amount on this screen.

 

• Click on Start and this is where you can remove the amount that is being subtracted.   Before you do that, make sure that there was not a portion of your MESP 529 withdrawal that was taxed on your federal return.

Remember being subtracted means you are not paying taxes on the amount being subtracted.  If you remove this amount from this box, this amount will remain in your taxable income and you will actually be paying more taxes.  

 

If you are sure that there are no qualified withdrawals included in your income then, this is where you would remove the amount from the subtraction.

 

Let us know if you're able to make manual adjustment in forms mode. I tried to zero out withdrawal amount  and got error msg that amount must be greater than 0.