Illinois - Nonqualified Bright Start 529 Distribution

[jpaihr]

In reporting nonqualified distributions from IL Bright Start 529 plan on IL Schedule M, do I include earnings and basis in the "2020 amount withdrawn..." box or the gross amount?

[KrisD15]

You would enter the total amount that you withdrew as a nonqualifying distribution. This would include the earnings and basis both of that amount. 

According to the Sate of Illinois:

"Line 9 — Recapture of deductions for contributions to college savings plans withdrawn for nonqualified expenses or refunded If you withdrew funds or received a refund of contributions from a qualified tuition program, the funds were not used for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. Write the smaller of the amount of deductions you claimed for amounts contributed to an Illinois college savings 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."

Schedule M page 2

[jpaihr]

Thanks for the reply! I did read the instructions and felt it wasn't clear on this point. Technically the earnings weren't ever deducted. Is there some other guidance on this point that you're aware of or standard that tax preparers go by based on their experiences?

[AmyC · Accepted solution]

See examples below. So you contributed money to the plan, took the deductions for the money contributed and that part is normal. The earnings on the money are not deducted, they are withdrawn and taxes paid at that time, no reduction in earnings since there was never a deduction.

Example 1:

Contribute $2,000

Deduct $2,000 on taxes

Earn $200

Withdraw money of $2200 for no qualified reason. This requires you change the basis and recapture what was deducted, the full $2,000.

The taxable amount is the entire $2,200.

Example 2.

Same as above except only deducted $1,000 on taxes.

Now, the taxable amount is $1,200.