Are qualified tuition program distributions for college tax free or do they have to be reported on my tax return?

With higher education costs climbing steadily upward nearly 8% per year many families are particularly concerned about accumulating enough money to put their children through college. College cost projections are continually increasing. Based on the latest averages from The College Board and recent average annual college cost increases, a child who entered kindergarten in 1995 will face four-year college costs of nearly $100,000 if he or she chooses to attend a public college in 2007. For a private college, costs will probably be double that.

Qualified tuition programs are tax favored programs established by a state. Many states have tax favored qualified tuition programs and more are in the approval process.

There's basically two types of tax favored qualified tuition programs:

	college tuition prepayment plans; and
	savings plan trusts.

College tuition prepayment plans are exactly what their name implies, prepayment plans. Savings plan trusts are tax deferred accounts in which the earnings build up tax free.

In general, earnings on qualified tuition programs are free from tax within the program or account. When withdrawals are made from a qualified tuition program, the earnings will be included in the student's taxable income on his/her tax return. However, to the extent that a distribution from a qualified tuition program is used to pay qualified tuition and fees, a HOPE Tax Credit or Lifetime Learning Tax Credit with respect to such tuition and fees will be available to the student or other qualified taxpayer (assuming that the other requirements are satisfied and the modified AGI phase out for those tax credits does not apply).

Contributions to qualified tuition programs qualify for the annual $10,000 gift tax exclusion, and you may elect to treat a contribution to a qualified tuition program as if made over a five tax year period for purposes of the annual $10,000 gift tax exclusion.

For example, if you transfer $30,000 to a qualified tuition program to benefit your child, the transfer is considered a gift that qualifies for the annual $10,000 gift tax exclusion. In addition, you may make an election to treat the gift as if made over five tax years. If made, you will be deemed to have made a $6,000 gift ($30,000 divided by five tax years) that qualifies for the annual gift tax exclusion in each of the five tax years.

Related tax information about qualified tuition programs

Tax Directory Topics:
Academic Scholarships
Educational Assistance Exclusion
Education IRAs
Hope Tax Credit
Lifetime Learning Tax Credit
Student Loan Interest Tax Deduction
U.S. Savings Bond Tuition Plans
Dependent Tax Issues

IRS publications about qualified tuition programs for college:
For further information refer to IRS Publication 970, Tax Benefits for Higher Education; IRS Publication 508, Educational Expenses; IRS Publication 1577,

Applying for Educational Financial Aid; and IRS Publication 520,

Scholarships and Fellowships. Also see IRS Publication 17,

Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.

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