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Iowa 1040xIowa 1040x 8. Iowa 1040x Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Iowa 1040x Half-time student. Iowa 1040x How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Iowa 1040x ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Iowa 1040x Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Iowa 1040x If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Iowa 1040x You cannot deduct either payments or contributions to a QTP. Iowa 1040x For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Iowa 1040x What is the tax benefit of a QTP. Iowa 1040x No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Iowa 1040x See Are Distributions Taxable , later, for more information. Iowa 1040x Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Iowa 1040x See Coordination With American Opportunity and Lifetime Learning Credits, later. Iowa 1040x What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Iowa 1040x QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Iowa 1040x The program must meet certain requirements. Iowa 1040x Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Iowa 1040x Qualified education expenses. Iowa 1040x These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Iowa 1040x As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Iowa 1040x See Half-time student , later. Iowa 1040x The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Iowa 1040x Tuition and fees. Iowa 1040x Books, supplies, and equipment. Iowa 1040x Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Iowa 1040x Expenses for room and board must be incurred by students who are enrolled at least half-time. Iowa 1040x The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Iowa 1040x The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Iowa 1040x The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Iowa 1040x You will need to contact the eligible educational institution for qualified room and board costs. Iowa 1040x For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Iowa 1040x Designated beneficiary. Iowa 1040x The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Iowa 1040x The designated beneficiary can be changed after participation in the QTP begins. Iowa 1040x If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Iowa 1040x Half-time student. Iowa 1040x A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Iowa 1040x Eligible educational institution. Iowa 1040x For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Iowa 1040x S. Iowa 1040x Department of Education. Iowa 1040x It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Iowa 1040x The educational institution should be able to tell you if it is an eligible educational institution. Iowa 1040x Certain educational institutions located outside the United States also participate in the U. Iowa 1040x S. Iowa 1040x Department of Education's Federal Student Aid (FSA) programs. Iowa 1040x How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Iowa 1040x There are no income restrictions on the individual contributors. Iowa 1040x You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Iowa 1040x Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Iowa 1040x This is a return of the investment in the plan. Iowa 1040x The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Iowa 1040x Earnings and return of investment. Iowa 1040x You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Iowa 1040x The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Iowa 1040x Form 1099-Q should be sent to you by January 31, 2014. Iowa 1040x Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Iowa 1040x Adjusted qualified education expenses. Iowa 1040x This amount is the total qualified education expenses reduced by any tax-free educational assistance. Iowa 1040x Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Iowa 1040x Taxable earnings. Iowa 1040x Use the following steps to figure the taxable part. Iowa 1040x Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Iowa 1040x The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Iowa 1040x Subtract the amount figured in (1) from the total distributed earnings. Iowa 1040x The result is the amount the beneficiary must include in income. Iowa 1040x Report it on Form 1040 or Form 1040NR, line 21. Iowa 1040x Example 1. Iowa 1040x In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Iowa 1040x Over the years they contributed $18,000 to the account. Iowa 1040x The total balance in the account was $27,000 on the date the distribution was made. Iowa 1040x In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Iowa 1040x She paid her college expenses from the following sources. Iowa 1040x Gift from parents $1,600 Partial tuition scholarship (tax-free) 3,100 QTP distribution 5,300 Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Iowa 1040x Total qualified education expenses $8,300 Minus: Tax-free educational assistance −3,100 Equals: Adjusted qualified education expenses (AQEE) $5,200 Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Iowa 1040x Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Iowa 1040x Sara figures the taxable part of the distributed earnings as follows. Iowa 1040x 1. Iowa 1040x $950 (earnings) × $5,200 AQEE $5,300 distribution =$932 (tax-free earnings) 2. Iowa 1040x $950 (earnings)−$932 (tax-free earnings) =$18 (taxable earnings) Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Iowa 1040x Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Iowa 1040x This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Iowa 1040x Example 2. Iowa 1040x Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Iowa 1040x Total qualified education expenses $8,300 Minus: Tax-free educational assistance −3,100 Minus: Expenses taken into account in figuring American opportunity credit −4,000 Equals: Adjusted qualified education expenses (AQEE) $1,200 The taxable part of the distribution is figured as follows. Iowa 1040x 1. Iowa 1040x $950 (earnings) × $1,200 AQEE $5,300 distribution =$215 (tax-free earnings) 2. Iowa 1040x $950 (earnings)−$215 (tax-free earnings) =$735 (taxable earnings) Sara must include $735 in income (Form 1040, line 21). Iowa 1040x This represents distributed earnings not used for adjusted qualified education expenses. Iowa 1040x Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Iowa 1040x For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Iowa 1040x Example 3. Iowa 1040x Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Iowa 1040x In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Iowa 1040x $1,200 AQHEE × $700 ESA distribution $5,300 total distribution = $158 AQHEE (ESA) $1,200 AQHEE × $4,600 QTP distribution $5,300 total distribution = $1,042 AQHEE (QTP) Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Iowa 1040x Note. Iowa 1040x If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Iowa 1040x Coordination With Tuition and Fees Deduction. Iowa 1040x A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Iowa 1040x Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Iowa 1040x You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Iowa 1040x Your basis is the total amount of contributions to that QTP account. Iowa 1040x You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Iowa 1040x If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Iowa 1040x ) from all such accounts in order to determine your taxable earnings for the year. Iowa 1040x By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Iowa 1040x Example 1. Iowa 1040x In 2013, Taylor received a final distribution of $1,000 from QTP #1. Iowa 1040x His unrecovered basis in that account before the distribution was $3,000. Iowa 1040x If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Iowa 1040x Example 2. Iowa 1040x Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Iowa 1040x His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Iowa 1040x Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Iowa 1040x In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Iowa 1040x 1. Iowa 1040x $10,000 (total distribution)−$4,500 (basis portion of distribution) = $5,500 (earnings included in distribution) 2. Iowa 1040x $5,500 (earnings) x $6,000 AQEE $10,000 distribution =$3,300 (tax-free earnings) 3. Iowa 1040x $5,500 (earnings)−$3,300 (tax-free earnings) =$2,200 (taxable earnings) Taylor must include $2,200 in income on Form 1040, line 21. Iowa 1040x Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Iowa 1040x Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Iowa 1040x Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Iowa 1040x Exceptions. Iowa 1040x The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Iowa 1040x Made because the designated beneficiary is disabled. Iowa 1040x A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Iowa 1040x A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Iowa 1040x Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Iowa 1040x Made on account of the attendance of the designated beneficiary at a U. Iowa 1040x S. Iowa 1040x military academy (such as the USNA at Annapolis). Iowa 1040x This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Iowa 1040x S. Iowa 1040x Code) attributable to such attendance. Iowa 1040x Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. Iowa 1040x ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Iowa 1040x Figuring the additional tax. Iowa 1040x Use Part II of Form 5329, to figure any additional tax. Iowa 1040x Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Iowa 1040x Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Iowa 1040x In addition, the designated beneficiary can be changed without transferring accounts. Iowa 1040x Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Iowa 1040x An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Iowa 1040x Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Iowa 1040x These are not taxable distributions. Iowa 1040x Members of the beneficiary's family. Iowa 1040x For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Iowa 1040x Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Iowa 1040x Brother, sister, stepbrother, or stepsister. Iowa 1040x Father or mother or ancestor of either. Iowa 1040x Stepfather or stepmother. Iowa 1040x Son or daughter of a brother or sister. Iowa 1040x Brother or sister of father or mother. Iowa 1040x Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Iowa 1040x The spouse of any individual listed above. Iowa 1040x First cousin. Iowa 1040x Example. Iowa 1040x When Aaron graduated from college last year he had $5,000 left in his QTP. Iowa 1040x He wanted to give this money to his younger brother, who was in junior high school. Iowa 1040x In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Iowa 1040x If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Iowa 1040x Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Iowa 1040x See Members of the beneficiary's family , earlier. Iowa 1040x Example. Iowa 1040x Assume the same situation as in the last example. Iowa 1040x Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. Iowa 1040x Prev Up Next Home More Online Publications
Service Contracts and Extended Warranties
Assess Your Needs
Only you can decide if you need these features. Sellers of cars, major appliances and other expensive items may try to sell you a service contract or "extended warranty." Service contracts or "extended warranties" can add hundreds to your purchase price and are rarely worth the cost. Some sellers may try to frighten you or lead you to believe that purchasing an extended warranty is required. Some duplicate warranty coverage you get automatically from a manufacturer or dealer. Ask these questions before you agree to one of these contracts:
- Does the dealer, the manufacturer, or an independent company back the service contract?
- How are claims handled? Who will do the work and where it will be done?
- What happens to your coverage if the dealer or administrator goes out of business?
- Do you need prior authorization for repair work?
- Are there any situations when coverage can be denied? You may not have protection from common wear and tear. And some manufacturers do not honor contracts if you fail to follow their recommendations for routine maintenance.