529 Deduction Recapture

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
SteelyEyed
Posts: 322
Joined: Sun Jun 14, 2009 10:34 am

529 Deduction Recapture

Post by SteelyEyed » Tue Feb 25, 2020 12:25 pm

I contributed a significant amount to two 529s and received state income tax deductions. I have since moved away from that state. The law does provide for the recapture of the taxes, but with $0 income in that state and no residency status, I don't think I have to file a return ever again. I would like to consolidate/simplify and bring those plans to Nevada/Vanguard. Does anybody have experience in this? Was there a way for the previous state to recapture from you?

I understand that I haven't identified the state.

mhalley
Posts: 8311
Joined: Tue Nov 20, 2007 6:02 am

Re: 529 Deduction Recapture

Post by mhalley » Tue Feb 25, 2020 12:43 pm

It looks like most states with a state tax deduction have a recapture provision. I don’t know how the recapture works, but I imagine the 529 plan company knows about the deduction and it would be simple for them to deduct it from any 529 rollover. If they don’t deduct it, they would most likely send a demand letter. I found this in the IN 529 docs
If an account owner is not otherwise required to file an annual income tax return for a taxable year in which a nonqualified withdrawal is made and the account owner does not make the required repayment, the department shall issue a demand notice in accordance with IC 6-8.1-8-2.
https://www.in.gov/dor/reference/files/ib98.pdf
Last edited by mhalley on Tue Feb 25, 2020 12:49 pm, edited 1 time in total.

DIFAR31
Posts: 414
Joined: Mon Jan 01, 2018 5:51 pm

Re: 529 Deduction Recapture

Post by DIFAR31 » Tue Feb 25, 2020 12:49 pm

mhalley wrote:
Tue Feb 25, 2020 12:43 pm
It looks like most states with a state tax deduction have a recapture provision. I don’t know how the recapture works, but I imagine the 529 plan company knows about the deduction and it would be simple for them to deduct it from any 529 rollover.
How would the plan administrator know if a contributor took a deduction on their state tax return for a 529 contribution?

mhalley
Posts: 8311
Joined: Tue Nov 20, 2007 6:02 am

Re: 529 Deduction Recapture

Post by mhalley » Tue Feb 25, 2020 12:50 pm

I don’t know, just thought it might be possible.

PatrickA5
Posts: 532
Joined: Mon Jul 28, 2014 1:55 pm

Re: 529 Deduction Recapture

Post by PatrickA5 » Tue Feb 25, 2020 12:52 pm

Since your state that the state has a recapture provision, I know of no way that you wouldn't need to report it to the state assuming it's enough money to require you to file a state tax return.

User avatar
Topic Author
SteelyEyed
Posts: 322
Joined: Sun Jun 14, 2009 10:34 am

Re: 529 Deduction Recapture

Post by SteelyEyed » Tue Feb 25, 2020 1:27 pm

mhalley wrote:
Tue Feb 25, 2020 12:43 pm
It looks like most states with a state tax deduction have a recapture provision. I don’t know how the recapture works, but I imagine the 529 plan company knows about the deduction and it would be simple for them to deduct it from any 529 rollover. If they don’t deduct it, they would most likely send a demand letter. I found this in the IN 529 docs
If an account owner is not otherwise required to file an annual income tax return for a taxable year in which a nonqualified withdrawal is made and the account owner does not make the required repayment, the department shall issue a demand notice in accordance with IC 6-8.1-8-2.
https://www.in.gov/dor/reference/files/ib98.pdf
Thank you. There are specific lines in the income tax return for 529 contributions and for non-qualified withdrawals and rollovers. I will look for something similar regarding demand notices.

User avatar
Topic Author
SteelyEyed
Posts: 322
Joined: Sun Jun 14, 2009 10:34 am

Re: 529 Deduction Recapture

Post by SteelyEyed » Tue Feb 25, 2020 1:32 pm

PatrickA5 wrote:
Tue Feb 25, 2020 12:52 pm
Since your state that the state has a recapture provision, I know of no way that you wouldn't need to report it to the state assuming it's enough money to require you to file a state tax return.
I think it isn't income. I'm not withdrawaling it, I'm rolling it over. It's an adjustment to income and it gets listed on an attachment. To be required to file, one must a) be required to file a federal return AND b) be a resident or have income based in the state.

User avatar
anon_investor
Posts: 2338
Joined: Mon Jun 03, 2019 1:43 pm

Re: 529 Deduction Recapture

Post by anon_investor » Tue Feb 25, 2020 1:40 pm

I do not know if this is how it works, but I would assume that the 529 plan administrator would issue some kind of tax form, which would be received by you and the state in question. The state would then be notified, and probably try to claw back any deduction you took. There is no sense trying to rationalize state tax law and policy.

I am in a similar situation with 529 plans from a state where I used to reside and has a recapture provision. I just deal with having multiple 529 plan accounts. It is not the end of the world.

DIFAR31
Posts: 414
Joined: Mon Jan 01, 2018 5:51 pm

Re: 529 Deduction Recapture

Post by DIFAR31 » Tue Feb 25, 2020 1:55 pm

anon_investor wrote:
Tue Feb 25, 2020 1:40 pm
I do not know if this is how it works, but I would assume that the 529 plan administrator would issue some kind of tax form, which would be received by you and the state in question. The state would then be notified, and probably try to claw back any deduction you took. There is no sense trying to rationalize state tax law and policy.

I am in a similar situation with 529 plans from a state where I used to reside and has a recapture provision. I just deal with having multiple 529 plan accounts. It is not the end of the world.
The 529 plan administrator will send out one or more 1099-Q forms if there were any account distributions made during the tax year, and as far as I know the forms will only go to the IRS and the account owner and/or beneficiary. Also, the 1099-Q makes no distinction between qualified and non-qualified distributions.

increment
Posts: 305
Joined: Tue May 15, 2018 2:20 pm

Re: 529 Deduction Recapture

Post by increment » Tue Feb 25, 2020 2:35 pm

SteelyEyed wrote:
Tue Feb 25, 2020 1:32 pm
I think it isn't income. I'm not withdraw[]ing it, I'm rolling it over. It's an adjustment to income and it gets listed on an attachment. To be required to file, one must a) be required to file a federal return AND b) be a resident or have income based in the state.
The fine print for the New York Direct plan seems to say that they regard a nonqualified distribution (which, for state purposes, includes rollovers to other states' plans) as income based in New York.

PatrickA5
Posts: 532
Joined: Mon Jul 28, 2014 1:55 pm

Re: 529 Deduction Recapture

Post by PatrickA5 » Tue Feb 25, 2020 5:37 pm

I know in my state a deduction that has to be recaptured is indeed income - even if it is included as an adjustment to income. It's still included in taxable income. I waited until after my states recapture rules no longer applied and then rolled over my 529 to Fidelity.

Spirit Rider
Posts: 13212
Joined: Fri Mar 02, 2007 2:39 pm

Re: 529 Deduction Recapture

Post by Spirit Rider » Tue Feb 25, 2020 5:45 pm

DIFAR31 wrote:
Tue Feb 25, 2020 12:49 pm
mhalley wrote:
Tue Feb 25, 2020 12:43 pm
It looks like most states with a state tax deduction have a recapture provision. I don’t know how the recapture works, but I imagine the 529 plan company knows about the deduction and it would be simple for them to deduct it from any 529 rollover.
How would the plan administrator know if a contributor took a deduction on their state tax return for a 529 contribution?
The plan administrator doesn't know or care about taxation. It just reports the distribution and the amount of taxable earnings on Form 1099-Q. The state will receive the 1099-Qs for all accounts in that state's 529 plan regardless of where the account owner is living.

Spirit Rider
Posts: 13212
Joined: Fri Mar 02, 2007 2:39 pm

Re: 529 Deduction Recapture

Post by Spirit Rider » Tue Feb 25, 2020 6:56 pm

SteelyEyed wrote:
Tue Feb 25, 2020 1:32 pm
PatrickA5 wrote:
Tue Feb 25, 2020 12:52 pm
Since your state that the state has a recapture provision, I know of no way that you wouldn't need to report it to the state assuming it's enough money to require you to file a state tax return.
I think it isn't income. I'm not withdrawaling it, I'm rolling it over. It's an adjustment to income and it gets listed on an attachment. To be required to file, one must a) be required to file a federal return AND b) be a resident or have income based in the state.
A 529 rollover is a distribution followed by a rollover contribution. It will be reported on Form 1099-Q regardless whether is a 60-day indirect rollover or a trustee -> trustee transfer. In the latter case, Box 4 will be checked.

The state will receive a copy of the 1099-Q regardless if you still live in the state. If you can not prove the distribution was for qualified educational expenses it will be subject to recapture provisions. Regardless whether it was a non-qualified distribution or rollover/transfer to another state's 529 plan.

User avatar
abuss368
Posts: 20129
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: 529 Deduction Recapture

Post by abuss368 » Tue Feb 25, 2020 7:15 pm

SteelyEyed wrote:
Tue Feb 25, 2020 12:25 pm
I contributed a significant amount to two 529s and received state income tax deductions. I have since moved away from that state. The law does provide for the recapture of the taxes, but with $0 income in that state and no residency status, I don't think I have to file a return ever again. I would like to consolidate/simplify and bring those plans to Nevada/Vanguard. Does anybody have experience in this? Was there a way for the previous state to recapture from you?

I understand that I haven't identified the state.
Sounds like New York.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

User avatar
nps
Posts: 1034
Joined: Thu Dec 04, 2014 10:18 am

Re: 529 Deduction Recapture

Post by nps » Tue Feb 25, 2020 9:31 pm

abuss368 wrote:
Tue Feb 25, 2020 7:15 pm
SteelyEyed wrote:
Tue Feb 25, 2020 12:25 pm
I contributed a significant amount to two 529s and received state income tax deductions. I have since moved away from that state. The law does provide for the recapture of the taxes, but with $0 income in that state and no residency status, I don't think I have to file a return ever again. I would like to consolidate/simplify and bring those plans to Nevada/Vanguard. Does anybody have experience in this? Was there a way for the previous state to recapture from you?

I understand that I haven't identified the state.
Sounds like New York.
Sounds like a lot of states. Recapture provisions are fairly common:

https://www.savingforcollege.com/compar ... _questions

User avatar
Harry Livermore
Posts: 395
Joined: Thu Apr 04, 2019 5:32 am

Re: 529 Deduction Recapture

Post by Harry Livermore » Wed Feb 26, 2020 4:44 am

OP, why not just leave the money in whichever state plan they are already in? You can open new 529s in your new state and start contributing there. Or am I missing something about 529s whereby you can only use one state/ vendor at a time?
I understand the simplicity argument. But it's just numbers on a statement, and a spreadsheet (if you keep one)
We opened Coverdells for our kids when they were born. When 529s became a better strategy with higher contribution limits, we switched new contributions to our 529s. But I just left the Coverdells alone. There was/ is enough to cover each kid's freshman year (more or less), leaving the balance to be funded out of the 529s.
Something to consider.
Cheers

SchruteB&B
Posts: 301
Joined: Mon Jul 02, 2018 7:48 am

Re: 529 Deduction Recapture

Post by SchruteB&B » Wed Feb 26, 2020 6:32 am

Harry Livermore wrote:
Wed Feb 26, 2020 4:44 am
OP, why not just leave the money in whichever state plan they are already in? You can open new 529s in your new state and start contributing there. Or am I missing something about 529s whereby you can only use one state/ vendor at a time?
You can have multiple 529s in multiple states at the same time.

User avatar
happymob
Posts: 647
Joined: Wed Nov 18, 2009 4:09 pm

Re: 529 Deduction Recapture

Post by happymob » Wed Feb 26, 2020 7:43 am

Harry Livermore wrote:
Wed Feb 26, 2020 4:44 am
OP, why not just leave the money in whichever state plan they are already in? You can open new 529s in your new state and start contributing there. Or am I missing something about 529s whereby you can only use one state/ vendor at a time?
I understand the simplicity argument. But it's just numbers on a statement, and a spreadsheet (if you keep one)
We opened Coverdells for our kids when they were born. When 529s became a better strategy with higher contribution limits, we switched new contributions to our 529s. But I just left the Coverdells alone. There was/ is enough to cover each kid's freshman year (more or less), leaving the balance to be funded out of the 529s.
Something to consider.
Cheers
This is the correct answer. The recapture only kicks in if you have a non-qualified withdrawal (in some states) and/or you move the money into another plan (in some states). Just don't move the money. Put new money into a plan that qualifies for the new state.

Post Reply