Section 529 - Qualified Tuition Plans
HR-1836, otherwise known as the Economic Growth and Tax Relief Reconciliation Act of 2001, which was signed by President Bush on June 7, 2001, changed the income tax treatment of Qualified Tuition Plans established under section 529 of the Internal Revenue Code.
For Federal income tax purposes the Economic Growth and Tax Relief Reconciliation Act of 2001 provides that the earnings from a Qualified Tuition Plan are tax-free if used to pay qualified education expenses. The exclusion from gross income is also extended to distributions from qualified tuition programs established and maintained by an educational entity other than a state (such as a private institution) for distributions made in taxable years after December 31, 2003. Taxpayers are allowed to roll over credits or other amounts for a designated beneficiary from one Qualified Tuition Plan to another. Taxpayers are only allowed one rollover per 12-month period, and there is a lifetime limit of three rollovers.
For New Jersey income tax purposes, a qualified state tuition program is defined as one established under section 529 of the Internal Revenue Code. Presently, N.J.S.A. 54A:6-25 allows the earnings accumulating in a qualified state tuition program account to be excluded from New Jersey gross income. Upon distribution, any amounts that are used for higher education expenses (as defined under section 529 of the Internal Revenue Code) are then excluded from the taxpayer's income. A rollover from one account to another is considered a qualified distribution within the meaning of N.J.S.A. 54A:6-25 if it meets the requirement in section 529(c)(3)(C)(i) of the Internal Revenue Code.
The amendments to Federal law regarding income tax treatment of distributions and earnings from a Qualified Tuition Plan correspond to the current treatment for New Jersey gross income tax purposes under N.J.S.A. 54A:6-25. The Economic Growth and Tax Relief Reconciliation Act of 2001, therefore, has no effect on the New Jersey income tax treatment of distributions and earnings from a Qualified Tuition Plan.