state tax recapture from Ohio's 529 contribution when two different beneficiaries are changed into one?

[johnng]

My husband is thinking of opening two Ohio's 529 accounts - one for me and another one for my daughter and contribute $4,000 to each account. As state tax deduction is per beneficiary, we should be able to claim $8,000 state tax deduction thanks to these contributions, shouldn't we? But what if in the future we will change the beneficiary from myself to the same daughter (assume we won't have any other one to transfer the account to), i.e., my daughter will become the beneficiary of both accounts. Is there any state tax recapture for the deduction we claim before such a beneficiary change?

Also, likely that in the future we move to another state but still have passive income from Ohio, can we still get Ohio state tax deduction for our passive Ohio income from our Ohio's 529 contribution (when we file tax as part year or non-resident)?

[Hal_Al · Accepted solution]

Q.  We should be able to claim $8,000 state tax deduction thanks to these contributions, shouldn't we?

A. Yes. As you said, the $4000 limit is per beneficiary.

Q. Is there any state tax recapture for the deduction we claim before such a beneficiary change?

A. No. The only recapture is if you withdraw the money for non educational reasons.  Another way to look at it: if you contributed $8000 to your daughter's 529, you will be able to deduct $4000 this year and carry over $4000 to deduct the following year.  It's the same effect, you get to deduct $8000 either way.

Q. Can we still get Ohio state tax deduction for our passive Ohio income from our Ohio's 529 contribution (when we file tax as part year or non-resident)?

A. Yes. There was a similar question, in this forum, a few days ago.  I wasn't sure of the answer, so I asked the question at the Ohio Dept. of Taxation (ODT) web site:

Q.  Taxpayer moves from Ohio to another state and makes an Ohio 529 College advantage contribution AFTER the move. Can he claim the 529 deduction on his part year Ohio return?

A. Yes, the deduction is allowed. The key is that the contribution is to an Ohio 529 plan.

[Carl]

I am by no means very knowledgeable on 529 deductions on state tax returns. That's mostly because I live in a state that does not tax personal income. But while reading through the post and the response, it raised a question with me, and I'm not even sure it's a valid question. But here goes.

Q.  Taxpayer moves from Ohio to another state and makes an Ohio 529 College advantage contribution AFTER the move. Can he claim the 529 deduction on his part year Ohio return?

A. Yes, the deduction is allowed. The key is that the contribution is to an Ohio 529 plan.

If the contributor has no income that is taxable by the state of Ohio, then am I correct in assuming there is nothing to deduct from Ohio state income? It is stated that there is "passive" income from the state of Ohio that will have to be reported to that state. But can that contribution be deducted from passive income? I don't know, so that's why I bring it up in case it was something overlooked originally. Plus is that passive income is from long term residential real estate, will there actually be a taxable profit on the state tax return that will benefit you by deducting the 529 contribution from it? I ask, because it's not all that common for long term residential real estate to actually show a taxable profit "on paper" at tax filing time - especially if there is a mortgage on the property.

Then there's the question of the state you are moving to. Will the new state be your new tax home? If so, does that state tax personal income? If so, does that state allow a deduction for 529 contributions to an out of state plan? If so, then obviously you can't double dip. but will claiming the deduction on the "new" state return (if allowed) be more tax advantageous than claiming it on the "old" state return?

If the new state will be your new tax home, then that means you would be filing a part year resident return for OH for the period of the year you lived there, as well as a part year resident return for your new state if that new state taxes personal income. Does this have an impact on what you're "allowed" to claim?

Again, I don't know the answers to these questions. But it's questions I would probably be asking were I in your situation.

[Hal_Al]

Another wrinkle: rental income in Ohio qualifies for Ohio's Business Income Deduction (BID).

So, yes. the 529 deduction would be allowed against passive income; but taxpayer might not be able to use it because the BID already gets his taxable income to zero. 

His taxable income will be zero in Ohio, but not his new state of residence. He'll pay tax on the income to his resident state and get no credit because he didn't pay tax to Ohio. So, except in the year he moves, the OH deduction (529 or BID) does him no good (unless he moves to a state without an income tax).

[johnng]

Excellent reminder about BID!! Thank you so much Hal_Al.

[johnng]

529 contributions into two accounts with two different beneficiaries will allow a total of  $8k deduction in a single year while an $8k contribution to a single account will give a $4k deduction/year in two years.