Qualified Tuition Programs

• Qualified tuition programs are a creation of state governments that allow its residents to prepay tuition at schools throughout the state. As long as you adhere to the rules of your state, you can set up a QTP for any beneficiary, regardless of whether it's a friend, relative or your own child. By prepaying college credits for a future student-beneficiary, it allows you to lock-in the cost of college at current rates.
  
  

QTP Contributions

• The account owner, which is the person who contributes money for the beneficiary, doesn't receive a federal tax deduction for the contributions they make. Depending on the state you reside in, some state income tax deductions may be available. However, the account owner is not responsible for paying annual state or federal income taxes on the earnings within the 529 account. For purposes of a prepaid tuition plan, this means that you don't recognize income for the difference between what you pay for each college credit and what the school charges for each credit in future years. Essentially, the avoidance of inflationary increases to the cost of tuition is not taxable income. However, account owners cannot contribute any more funds than are necessary to prepay the tuition to shelter additional income from tax.
  
  

Beneficiary Tax Implications

• The beneficiary of the plan who you anticipate attending college in the future will not incur taxable income at any time, including when they begin using the prepaid school credits. In addition, the student remains eligible to claim the lifetime learning or American opportunity credits for the cost of enrolling in school. However, the beneficiary cannot include any of the school expenses they pay for using prepaid tuition credits from the 529 plan. Therefore, the credits are only available if the student is unable to pay for their entire education using the 529 funds.
  
  

Changing Beneficiaries

• In the event the account owner later determines that the initial beneficiary will not be attending higher education or chooses to changes the beneficiary for any other reason, the IRS will allow the new beneficiary to receive the prepaid credits tax-free as well. However, the account owner can only change the initial beneficiary to a family member. The IRS defines your family members as your children, stepchildren, foster children and all of their descendants. It also includes blood and step siblings, parents, step parents, grandparents, nieces and nephews, any in-law who is an immediate family member of your spouse, your first cousins plus the spouse of any eligible family member.