Michigan 529: deductions, rollovers, and K-12 expenses

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camillus
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Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Mon Jul 27, 2020 10:49 am

These are mainly just idle thoughts. I am currently paying private school tuition for my soon to be 1st grader and reside in Michigan. Michigan's 529 prohibits use of its funds for K-12 school, mainly for the purpose of preventing government funds from being used to aid religious schools. (There was recently a Supreme Court case with Montana. Michigan is different in that constitutionally all K-12 schools are excluded from receiving 529 funds, not just Montana's religious K-12 schools.)

In any case, I cooked up a scheme and wonder what would prevent it. Here it goes.

1. Contribute $10,000 to a Michigan 529 (max contribution eligible for state income tax deduction.)
2. The next year, roll over the 10k to an out-of-state 529 which allows use of funds for K-12. Set aside your cash flow that would have gone to tuition while you spend down your out-of-state 529.
3. The third year, "re-contribute" 10k to your Michigan 529...

Michigan's tax rate is ~ 4.25%, so this scheme would make a measly ~$212/year ($425 every other year).

petulant
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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by petulant » Mon Jul 27, 2020 12:07 pm

camillus wrote:
Mon Jul 27, 2020 10:49 am
These are mainly just idle thoughts. I am currently paying private school tuition for my soon to be 1st grader and reside in Michigan. Michigan's 529 prohibits use of its funds for K-12 school, mainly for the purpose of preventing government funds from being used to aid religious schools. (There was recently a Supreme Court case with Montana. Michigan is different in that constitutionally all K-12 schools are excluded from receiving 529 funds, not just Montana's religious K-12 schools.)

In any case, I cooked up a scheme and wonder what would prevent it. Here it goes.

1. Contribute $10,000 to a Michigan 529 (max contribution eligible for state income tax deduction.)
2. The next year, roll over the 10k to an out-of-state 529 which allows use of funds for K-12. Set aside your cash flow that would have gone to tuition while you spend down your out-of-state 529.
3. The third year, "re-contribute" 10k to your Michigan 529...

Michigan's tax rate is ~ 4.25%, so this scheme would make a measly ~$212/year ($425 every other year).
Most states have a clawback or recapture of the tax credit if you don't use the funds for education. Generally, a similar clawback applies if you perform a rollover to another state's 529 plan. There can also be annual netting requirements where instead of a contribution and withdrawal being treated separately, they are netted, reducing the deduction. Under these rules, a rollover to another 529 plan may count as a withdrawal and trigger the netting. Review the clawback and netting rules for your particular state.

For example, in my state, the netting rule includes rollovers to other 529 plans as a withdrawal, but the clawback is only for a period of 1 year from the date of contribution. So I could make a contribution on 11/30/01, get a deduction for year 01, then on 12/15/02 rollover to another 529, and have no problem, except that means I can't make a contribution in year 02 for a deduction. So best case under my state's rules, I could use your trick every other year.

Hopefully this helps clarify where you need to look on the Michigan 529 website.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by heerekj1 » Mon Jul 27, 2020 12:29 pm

I am contributing to a Michigan 529 plan to my son and it is intended for a potential grandchild. I checked with the Michigan Education Savings Program as to whether I would have to pay back the tax deduction if I did not have a grandchild and used the money for other purposes. They told me that they have no provision for getting the money back.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Mon Jul 27, 2020 2:08 pm

I wouldn’t rely on the 529 provider for tax advice.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Tue Jul 28, 2020 7:29 am

camillus wrote:
Mon Jul 27, 2020 10:49 am
1. Contribute $10,000 to a Michigan 529 (max contribution eligible for state income tax deduction.)
2. The next year, roll over the 10k to an out-of-state 529 which allows use of funds for K-12. Set aside your cash flow that would have gone to tuition while you spend down your out-of-state 529.
3. The third year, "re-contribute" 10k to your Michigan 529...
Michigan requires that any withdrawal other than for a qualified withdrawal (i.e. for education expenses) be added to your Michigan income. That includes qualified rollovers, taxable withdrawals and non-qualified withdrawals. You can subtract any contributions for which you did not receive a state tax deduction (e.g. you exceeded the contribution limit for deductions in a year). See the instructions for Line 8 of the Schedule 1 Additions to Income form.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by heerekj1 » Tue Jul 28, 2020 9:03 am

I did not mean to imply that a non-qualified distribution would not be taxed. I just meant that Michigan would not try to recover the tax deduction I took earlier when I made the contribution.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by MrJedi » Tue Jul 28, 2020 9:13 am

heerekj1 wrote:
Tue Jul 28, 2020 9:03 am
I did not mean to imply that a non-qualified distribution would not be taxed. I just meant that Michigan would not try to recover the tax deduction I took earlier when I made the contribution.
That deduction adds back into your income if the withdrawal is unqualified.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Tue Jul 28, 2020 10:18 am

MrJedi wrote:
Tue Jul 28, 2020 9:13 am
heerekj1 wrote:
Tue Jul 28, 2020 9:03 am
I did not mean to imply that a non-qualified distribution would not be taxed. I just meant that Michigan would not try to recover the tax deduction I took earlier when I made the contribution.
That deduction adds back into your income if the withdrawal is unqualified.
For example, if you made a $10k contribution in 2018, for which you received a $425 tax deduction. And then in 2020 either roll that $10k into another state’s plan or withdraw for non-education purposes. You will need to add that $10k back into your income, thus paying an extra $425 in taxes.

It appears though that if you are not a Michigan resident and have no Michigan income, that there would be no clawback.

edit: It also appears that earnings would be taxed by Michigan during a qualified rollover to another state's plan.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by heerekj1 » Tue Jul 28, 2020 6:24 pm

So, if I understand correctly. I contribute 10K in 2020 and receive a $435 tax deduction and then decide in 2035 that I am going to spend the money for a non-deductible education expense, I need to: 1) pay a 10% penalty on the investment growth, 2) pay income tax on the investment growth, and 3) redo my 2020 Michigan tax return to reflect the income.

easy-peasy

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Tue Jul 28, 2020 8:10 pm

rkhusky wrote:
Tue Jul 28, 2020 7:29 am
camillus wrote:
Mon Jul 27, 2020 10:49 am
1. Contribute $10,000 to a Michigan 529 (max contribution eligible for state income tax deduction.)
2. The next year, roll over the 10k to an out-of-state 529 which allows use of funds for K-12. Set aside your cash flow that would have gone to tuition while you spend down your out-of-state 529.
3. The third year, "re-contribute" 10k to your Michigan 529...
Michigan requires that any withdrawal other than for a qualified withdrawal (i.e. for education expenses) be added to your Michigan income. That includes qualified rollovers, taxable withdrawals and non-qualified withdrawals. You can subtract any contributions for which you did not receive a state tax deduction (e.g. you exceeded the contribution limit for deductions in a year). See the instructions for Line 8 of the Schedule 1 Additions to Income form.
Thanks, rkhusky. Take a look at this document: https://www.misaves.com/documents/mi_pl ... iption.pdf

Page 24: “No portion of a Qualified Rollover is subject to federal income tax, including the Additional Penalty Tax.” (See the whole section on “Qualified Rollovers.”)

Page 28: “Outgoing rollovers that are not subject to federal income tax also will not be subject to Michigan income tax.”

Curious what your read of the situation is after reviewing this doc.

It seems that my transaction in Step 2 in my OP would be a “qualified rollover” and thus exempt from federal and Michigan tax.

I think the critical word from the instructions from line 8 in Schedule 1 is this: “Add, to the extent not included in AGI, the amount of money withdrawn...”

The money is not withdrawn, it is rolled over to another 529 account, “qualified.”

It gets even more interesting. Apparently per the MESP description and the schedule 1 instructions, you can make a qualified rollover out of one siblings’ account for 10k and contribute a different 10k to a another sibling’s account in the same year and still qualify for maximum state income tax deduction.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Tue Jul 28, 2020 8:24 pm

heerekj1 wrote:
Tue Jul 28, 2020 6:24 pm
So, if I understand correctly. I contribute 10K in 2020 and receive a $435 tax deduction and then decide in 2035 that I am going to spend the money for a non-deductible education expense, I need to: 1) pay a 10% penalty on the investment growth, 2) pay income tax on the investment growth, and 3) redo my 2020 Michigan tax return to reflect the income.

easy-peasy
It’s kind of freaky how unclear/difficult the fed & state tax law is with 529s.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Tue Jul 28, 2020 8:47 pm

camillus wrote:
Tue Jul 28, 2020 8:10 pm
I think the critical word from the instructions from line 8 in Schedule 1 is this: “Add, to the extent not included in AGI, the amount of money withdrawn...”

The money is not withdrawn, it is rolled over to another 529 account, “qualified.”
There is this phrase at the end of the sentence: "if the withdrawal was not a qualified withdrawal as provided in the MESP or ABLE Acts." There are four types of withdrawals, only one of which is a qualified withdrawal. Qualified Rollover is one of the four types of withdrawals, Taxable Withdrawal and Non-qualified Withdrawal are the other two. None of the latter three are Qualified Withdrawals.
camillus wrote:
Tue Jul 28, 2020 8:10 pm
Page 28: “Outgoing rollovers that are not subject to federal income tax also will not be subject to Michigan income tax.”
That does seem to be in conflict with the MI-1040 instructions. But I would trust the latter over the former until shown otherwise. I suppose one needs to look at the Michigan statute to see which is correct.

Here is the text from MCL 206-30 (edit: this is an old version, current version does not have this text), which seems inline with the MI-1040 instructions:
(x) For tax years that begin after December 31, 1999, add, to the extent not included in adjusted gross income, the amount of money withdrawn by the taxpayer in the tax year from education savings accounts, not to exceed the total amount deducted under subdivision (w) in the tax year and all previous tax years, if the withdrawal was not a qualified withdrawal as provided in the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486. This subdivision does not apply to withdrawals that are less than the sum of all contributions made to an education savings account in all previous tax years for which no deduction was claimed under subdivision (w), less any contributions for which no deduction was claimed under subdivision (w) that were withdrawn in all previous tax years.
MCL 390.1472 has the following definitions:
(m) "Qualified higher education expenses" means qualified higher education expenses as defined in section 529 of the internal revenue code.

(n) "Qualified withdrawal" means a distribution that is not subject to a penalty or an excise tax under section 529 of the internal revenue code, a penalty under this act, or taxation under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532, and that meets any of the following:

(i) A withdrawal from an account to pay the qualified higher education expenses of the designated beneficiary incurred after the account is established.

(ii) A withdrawal made as the result of the death or disability of the designated beneficiary of an account.

(iii) A withdrawal made because a beneficiary received a scholarship that paid for all or part of the qualified higher education expenses of the beneficiary to the extent the amount of the withdrawal does not exceed the amount of the scholarship.

(iv) A transfer of funds due to the termination of the management contract as provided in section 5.

(v) A transfer of funds as provided in section 8.
Last edited by rkhusky on Wed Jul 29, 2020 8:46 am, edited 6 times in total.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Tue Jul 28, 2020 8:50 pm

heerekj1 wrote:
Tue Jul 28, 2020 6:24 pm
So, if I understand correctly. I contribute 10K in 2020 and receive a $435 tax deduction and then decide in 2035 that I am going to spend the money for a non-deductible education expense, I need to: 1) pay a 10% penalty on the investment growth, 2) pay income tax on the investment growth, and 3) redo my 2020 Michigan tax return to reflect the income.

easy-peasy
There is no need to redo your 2020 Michigan tax return. You just add the total withdrawal to your 2035 Michigan tax return.

It would pay to make sure that you are going to use the funds for qualified education expenses.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Tue Jul 28, 2020 10:01 pm

rkhusky wrote:[re qualified rollover/withdrawals]
Before looking at more legislation, at least I am not the only one confused:
savingforcollege.com wrote:State tax recapture provisions:
The principal portion of nonqualified withdrawals from this plan are included in Michigan taxable income to the extent of prior Michigan tax deductions. Qualified rollovers are not subject to recapture.
See https://www.savingforcollege.com/529-pl ... ogram-mesp
Last edited by camillus on Tue Jul 28, 2020 10:17 pm, edited 1 time in total.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Tue Jul 28, 2020 10:16 pm

I couldn't resist looking a bit more.
rkhusky wrote:
Tue Jul 28, 2020 8:47 pm
...
MCL 390.1472 has the following definitions:
...
(n) "Qualified withdrawal" means a distribution that is not subject to a penalty or an excise tax under section 529 of the internal revenue code, a penalty under this act, or taxation under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532, and that meets any of the following:
...
(v) A transfer of funds as provided in section 8.
Let's see what's in "section 8." Point 5 is especially interesting:
MCL 390.1478 wrote:(5) An account owner may transfer all or a portion of an account to an account in a qualified tuition
program under section 529 of the internal revenue code, other than the program under this act, once every 12
months, without a change in designated beneficiary.
Bada bing. A "qualified rollover" (once per 12 months to the same beneficiary) is a "qualified withdrawal." Right?

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Wed Jul 29, 2020 7:05 am

camillus wrote:
Tue Jul 28, 2020 10:16 pm
Let's see what's in "section 8." Point 5 is especially interesting:
MCL 390.1478 wrote:(5) An account owner may transfer all or a portion of an account to an account in a qualified tuition
program under section 529 of the internal revenue code, other than the program under this act, once every 12
months, without a change in designated beneficiary.
Bada bing. A "qualified rollover" (once per 12 months to the same beneficiary) is a "qualified withdrawal." Right?
Not sure now. The MCL 206-30 quote above is actually an old version from justia.com. I happened to look at the Michigan Legislature version and the text is different. Have to look through MCL 206.1 to 206.532 to see if there is anything there now about taxation of MESP withdrawals, since that is still a requirement, in addition to the (i)-(v) requirements.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Wed Jul 29, 2020 8:08 am

MCL 206-30 wrote:(u) Add, to the extent not included in adjusted gross income, the amount of money withdrawn by the
taxpayer in the tax year from education savings accounts, not to exceed the total amount deducted under
subdivision (t) in the tax year and all previous tax years, if the withdrawal was not a qualified withdrawal as
provided in the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486
...
I believe Michigan Income Tax Law (206) refers back to the MESP Act (390).

So let me build my case here from beginning to end. The question is whether a rollover from MESP to another state's 529 is subject to recapture of the state's income tax deduction. I'm a nurse here dabbling in law, so this is dangerous.
(n) "Qualified withdrawal" means a distribution that is not subject to a penalty or an excise tax under section 529 of the internal revenue code, a penalty under this act, or taxation under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532,
So far so good, I assume such a rollover doesn't violate federal section 529. MCL 206 simply refers back to the MESP Act (390) as established with the abovemost quote.
MCL 390 wrote:and that meets any of the following:
...
(v) A transfer of funds as provided in section 8.
...
(5) An account owner may transfer all or a portion of an account to an account in a qualified tuition
program under section 529 of the internal revenue code, other than the program under this act, once every 12
months, without a change in designated beneficiary.
I think I'm in the clear. I suppose the sensible thing to do is to call up MESP and just ask.

If possible, this presents the possibility of a certain level of slick schemery.

Scenario:
2 children
both attend private schools K-12 schools with 10k annual tuition
2 MI 529s
2 out of state 529s.

Year 1:
Rollover 10k from Child A's Michigan 529 to out of state 529 (net tax deduction "zero" - cannot be negative if a qualified withdrawal)
Withdraw same 10k from out of state 529 to pay for private K-12 tuition
Contribute 10k to Child B's Michigan 529, earn maximum income tax deduction (10k * 4.25% = $425)

Year 2:
Rollover 10k from Child B's Michigan 529 to out of state 529 (net deduction "zero")
Withdraw same 10k from out of state 529 to pay for private K-12 tuition
Contribute 10k to Child A's Michigan 529, earn maximum income tax deduction ($425)
MESP Plan Description wrote:Taxpayers may deduct for Michigan income tax purposes the net amount of their total contributions to Accounts — less any withdrawals during the tax year that were not subject to Michigan tax (Qualified Withdrawals, certain outgoing rollovers and certain Taxable Withdrawals). A taxpayer computes the net deduction amount separately for each Account (not less than zero),
and then aggregates the net amounts for each Account to arrive at the taxpayer’s total contribution deduction for the tax
year.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by heerekj1 » Wed Jul 29, 2020 8:49 am

Sorry to beat a dead horse.

If I make semi-regular contributions to my Michigan 529 plan and at the end of 15 years I have $100K of contributions and $50K of growth. I make a $15K non-qualified withdrawal. MESP informs me the $10K was part of my original contribution and thus not subject to tax or penalty and $5K was from growth(I believe they are require to take proportional withdrawal) and is subject to penalty and tax.

Over the years I have had about $5K worth of tax deductions. How much do I owe when I make the withdrawal?

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Wed Jul 29, 2020 8:56 am

camillus wrote:
Wed Jul 29, 2020 8:08 am
MCL 206-30 wrote:(u) Add, to the extent not included in adjusted gross income, the amount of money withdrawn by the
taxpayer in the tax year from education savings accounts, not to exceed the total amount deducted under
subdivision (t) in the tax year and all previous tax years, if the withdrawal was not a qualified withdrawal as
provided in the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486
...
I believe Michigan Income Tax Law (206) refers back to the MESP Act (390).
So, its a circular argument. 206 refers to 390 and 390 refers to 206.
camillus wrote:
Wed Jul 29, 2020 8:08 am
I think I'm in the clear. I suppose the sensible thing to do is to call up MESP and just ask.
Probably better to talk to the Michigan Dept of Treasury. The MESP separates withdrawals into four types, which are not apparently listed in the law that way.

But now that you've looked at the law, where does it say that withdrawals cannot be used for K-12? Assuming that Federal law allows it.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by rkhusky » Thu Jul 30, 2020 10:01 am

heerekj1 wrote:
Wed Jul 29, 2020 8:49 am
Sorry to beat a dead horse.

If I make semi-regular contributions to my Michigan 529 plan and at the end of 15 years I have $100K of contributions and $50K of growth. I make a $15K non-qualified withdrawal. MESP informs me the $10K was part of my original contribution and thus not subject to tax or penalty and $5K was from growth(I believe they are require to take proportional withdrawal) and is subject to penalty and tax.

Over the years I have had about $5K worth of tax deductions. How much do I owe when I make the withdrawal?
You would need to pay Michigan tax on $15k, which essentially makes it like you invested the $10k in a taxable account (might be second order effects that make it not an exact match). You would essentially be giving back the tax deduction on the contribution and paying tax on the earnings.

You would owe Federal tax + 10% penalty on the earnings, which is probably worse than investing in a taxable account, due to the penalty and the use of income tax rates vs cap gain rates.

Since the earnings of $5k are added to your Fed AGI, you would only add $10k on your MI tax return.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by petulant » Thu Jul 30, 2020 12:19 pm

camillus wrote:
Wed Jul 29, 2020 8:08 am
MCL 206-30 wrote:(u) Add, to the extent not included in adjusted gross income, the amount of money withdrawn by the
taxpayer in the tax year from education savings accounts, not to exceed the total amount deducted under
subdivision (t) in the tax year and all previous tax years, if the withdrawal was not a qualified withdrawal as
provided in the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486
...
I believe Michigan Income Tax Law (206) refers back to the MESP Act (390).

So let me build my case here from beginning to end. The question is whether a rollover from MESP to another state's 529 is subject to recapture of the state's income tax deduction. I'm a nurse here dabbling in law, so this is dangerous.
(n) "Qualified withdrawal" means a distribution that is not subject to a penalty or an excise tax under section 529 of the internal revenue code, a penalty under this act, or taxation under the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532,
So far so good, I assume such a rollover doesn't violate federal section 529. MCL 206 simply refers back to the MESP Act (390) as established with the abovemost quote.
MCL 390 wrote:and that meets any of the following:
...
(v) A transfer of funds as provided in section 8.
...
(5) An account owner may transfer all or a portion of an account to an account in a qualified tuition
program under section 529 of the internal revenue code, other than the program under this act, once every 12
months, without a change in designated beneficiary.
I think I'm in the clear. I suppose the sensible thing to do is to call up MESP and just ask.

If possible, this presents the possibility of a certain level of slick schemery.

Scenario:
2 children
both attend private schools K-12 schools with 10k annual tuition
2 MI 529s
2 out of state 529s.

Year 1:
Rollover 10k from Child A's Michigan 529 to out of state 529 (net tax deduction "zero" - cannot be negative if a qualified withdrawal)
Withdraw same 10k from out of state 529 to pay for private K-12 tuition
Contribute 10k to Child B's Michigan 529, earn maximum income tax deduction (10k * 4.25% = $425)

Year 2:
Rollover 10k from Child B's Michigan 529 to out of state 529 (net deduction "zero")
Withdraw same 10k from out of state 529 to pay for private K-12 tuition
Contribute 10k to Child A's Michigan 529, earn maximum income tax deduction ($425)
MESP Plan Description wrote:Taxpayers may deduct for Michigan income tax purposes the net amount of their total contributions to Accounts — less any withdrawals during the tax year that were not subject to Michigan tax (Qualified Withdrawals, certain outgoing rollovers and certain Taxable Withdrawals). A taxpayer computes the net deduction amount separately for each Account (not less than zero),
and then aggregates the net amounts for each Account to arrive at the taxpayer’s total contribution deduction for the tax
year.
Not quite. Your example has an implicit assumption that the rollover counts as both a qualified withdrawal from a plan *and* a contribution to a plan, then the contribution to the other plan is a new contribution that qualifies for the deduction. This may not be accurate. If you review MCL 206.30(1)(t)(i) closely, it may only remove from AGI the contributions to a Michigan plan. If that were so, then the qualified withdrawal each year would net against the new contribution, so the taxpayer would have to switch to every-other-year as in my original post.

(This is not legal advice.)

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by neurosphere » Thu Jul 30, 2020 1:14 pm

Why not contribute $20,000 per year to the 529? Then use $10,000/year for private school. In that situation, you'd:
1) Get to keep the tax deduction
2) Pay for private school from the 529
3) Have $10,000 left over to pay for future college.

You were planning to contribute to the 529 anyway at some point in order to pay for college too, right?

:D :D
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Thu Jul 30, 2020 10:36 pm

petulant wrote:Not quite. Your example has an implicit assumption that the rollover counts as both a qualified withdrawal from a plan *and* a contribution to a plan, then the contribution to the other plan is a new contribution that qualifies for the deduction. This may not be accurate. If you review MCL 206.30(1)(t)(i) closely, it may only remove from AGI the contributions to a Michigan plan. If that were so, then the qualified withdrawal each year would net against the new contribution, so the taxpayer would have to switch to every-other-year as in my original post.

(This is not legal advice.)
Here is the paragraph you reference:
MCL 206.30(1)(t)(i) wrote: (i) To the extent not deducted in determining adjusted gross income, contributions made by the taxpayer in the tax year less qualified withdrawals made in the tax year from education savings accounts, calculated on a per education savings account basis, pursuant to the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486, not to exceed a total deduction of $5,000.00 for a single return or $10,000.00 for a joint return per tax year. The amount calculated under this subparagraph for each education savings account shall not be less than zero.
I believe I have it right. Each year in my “slick schemers” scenario (ie Year 1, Year 2) one child’s account has a 10k outgoing rollover, net Michigan deduction 0, and the other child’s account has a 10k contribution, net Michigan deduction 10k. There are two children, and two MI 529 accounts.

There is no “netting” between the two Michigan accounts. The first account cannot have a negative 10k Michigan deduction.

Once the money is rolled out of Michigan 529 accounts, I believe I can abide by Federal law and the plan description of the national 529 plan and use the funds to pay for K-12 tuition without any influence in Michigan taxes.

Perhaps I am missing something and I am talking past you. If that’s the case please help me out! 😊
neurosphere wrote:
Thu Jul 30, 2020 1:14 pm
Why not contribute $20,000 per year to the 529?
I’m afraid I don’t have that kind of money 😊

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by petulant » Fri Jul 31, 2020 9:54 am

camillus wrote:
Thu Jul 30, 2020 10:36 pm
petulant wrote:Not quite. Your example has an implicit assumption that the rollover counts as both a qualified withdrawal from a plan *and* a contribution to a plan, then the contribution to the other plan is a new contribution that qualifies for the deduction. This may not be accurate. If you review MCL 206.30(1)(t)(i) closely, it may only remove from AGI the contributions to a Michigan plan. If that were so, then the qualified withdrawal each year would net against the new contribution, so the taxpayer would have to switch to every-other-year as in my original post.

(This is not legal advice.)
Here is the paragraph you reference:
MCL 206.30(1)(t)(i) wrote: (i) To the extent not deducted in determining adjusted gross income, contributions made by the taxpayer in the tax year less qualified withdrawals made in the tax year from education savings accounts, calculated on a per education savings account basis, pursuant to the Michigan education savings program act, 2000 PA 161, MCL 390.1471 to 390.1486, not to exceed a total deduction of $5,000.00 for a single return or $10,000.00 for a joint return per tax year. The amount calculated under this subparagraph for each education savings account shall not be less than zero.
I believe I have it right. Each year in my “slick schemers” scenario (ie Year 1, Year 2) one child’s account has a 10k outgoing rollover, net Michigan deduction 0, and the other child’s account has a 10k contribution, net Michigan deduction 10k. There are two children, and two MI 529 accounts.

There is no “netting” between the two Michigan accounts. The first account cannot have a negative 10k Michigan deduction.

Once the money is rolled out of Michigan 529 accounts, I believe I can abide by Federal law and the plan description of the national 529 plan and use the funds to pay for K-12 tuition without any influence in Michigan taxes.

Perhaps I am missing something and I am talking past you. If that’s the case please help me out! 😊
neurosphere wrote:
Thu Jul 30, 2020 1:14 pm
Why not contribute $20,000 per year to the 529?
I’m afraid I don’t have that kind of money 😊
Ah, yes, I see what you're saying now. So it's like the every-other-year plan I started out with, just staggered for two children, on the argument that there is no netting among the accounts. That makes sense, assuming your state's regulators and courts see it the same way.

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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by neurosphere » Fri Jul 31, 2020 10:48 am

Where would you invest your money within the 529 accounts? Money market fund, bonds? How much might you pay extra in fees compared to similar investments held elsewhere. Might the $212 annual savings get reduced to $198 perhaps? Don't forget to include time out of the market/investment during the rollover. :wink:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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camillus
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Re: Michigan 529: deductions, rollovers, and K-12 expenses

Post by camillus » Fri Jul 31, 2020 1:00 pm

neurosphere wrote:
Fri Jul 31, 2020 10:48 am
Where would you invest your money within the 529 accounts? Money market fund, bonds? How much might you pay extra in fees compared to similar investments held elsewhere. Might the $212 annual savings get reduced to $198 perhaps? Don't forget to include time out of the market/investment during the rollover. :wink:
Yes, it's all in fun. "Idle thoughts" as I open with in the OP. But this strategy combined with some other tax avoidance "lumping" strategies might actually be material. Say, the family in this scenario is religious and gives $10k to their church each year and is just on the edge of itemizing, but usually take the standard deduction.

Year 1
10k rolled over from MI 529 (total US stock) to out of state 529 (total US stock).
Out of state 529 used to pay private K-12 school instead of cash flow.
Cash flow is diverted instead to Donor Advised fund (total US stock).
The family can itemize this year since the contribution to the DAF puts them 10k above the standard deduction. They are in the 22% FIT bracket.
Tax saved, $2200.

Year 2
Instead of cash flowing charitable giving, the Donor Advised Fund is spent down.
The 10k cash flow typically designated for giving is contributed to a Michigan 529 (total US stock)
The $2200 in tax savings from the previous year is used to purchase total US stock in a taxable account
Tax saved, $425

Year 3
10k from Mi 529 to out of state 529, used for private school
10k in cash flow to DAF
$2200 in taxable goes to DAF
Previous year's $425 tax savings goes to taxable
Tax saved, $2684

Most of the tax savings comes from the Donor Advised Fund lumping strategy, but this is an example. Most of money is invested most of the time, with a decent return based on tax savings alone.

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