This content was published prior to the combination of Dentons Davis Brown. Learn more about Dentons Davis Brown.
The Iowa legislature recently enacted several new laws affecting the College Savings Iowa 529 Plan and the IAdvisor 529 Plan (the 529 Plans) in passing HF2641. These changes broaden what constitutes “qualified higher education expenses,” extend the deadline to make 529 Plan contributions for tax year 2019, and exclude from Iowa income refunds from higher education institutions that are re-contributed to a 529 plan.
Certain apprenticeship program expenses and student loan repayments treated as “qualified higher education expenses”
Federal legislation passed in 2019 expanded the types of expenses for which funds in a 529 college savings account can be used without losing favorable federal tax treatment of earnings on investments. The legislation permits certain apprenticeship program expenses and student loan repayments to be treated as “qualified higher education expenses.” Thus, with respect to the federal tax benefit, account owners can withdraw assets from 529 plans to pay apprenticeship program expenses or loan repayments and treat the withdrawals as qualified expenses.
As we indicated in our January post on the federal changes, it took an act of the Iowa legislature to extend favorable state tax treatment of contributions or withdrawals by Iowa 529 Plan participants to align with the federal changes. With the adoption of HF2641, withdrawals for certain expenses related to approved apprenticeship programs are now allowed. Individuals will be able to use their 529 accounts to pay for fees, books, supplies, and equipment required to participate in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act.
In addition, amounts paid as principal or interest on any qualified education loan of the beneficiary or a sibling may be treated as a “qualified higher education expense.” It is important to note that the total cumulative amount in all years that may be used from all accounts for repayment of loans of an individual may not exceed $10,000. Also, loan repayments paid with 529 account funds will reduce the amount of allowed student loan interest deduction to which the taxpayer might otherwise be entitled.
These provisions apply to distributions made after December 31, 2018.
2019 tax year 529 plan contribution deadline extended
Ordinarily, taxpayers may elect to treat contributions to 529 Plans made between January 1 and the filing deadline as if they were made during the previous calendar year for purposes of state income taxes, and thus deduct them on the prior year’s income tax return. When the income tax filing deadline was extended to July 31 due to COVID-19, it became unclear the extent to which taxpayers could elect to treat contributions made up to the extended filing deadline as if they were made in 2019.
In HF2641, the legislature provided that a participant who makes a 529 Plan contribution after January 1, 2020, but on or before July 31, 2020, may elect to treat the contribution as having been made in 2019, allowing the participant to deduct the contribution on their 2019 tax return, to the extent of the amount permitted by law.
Refunds from higher education institutions that are re-contributed to a 529 plan are excluded from Iowa income
As a result of COVID-19, many colleges and universities have issued refunds to students and families for tuition, housing costs, and other higher education expenses. Iowa law permits taxpayers to deduct certain contributions to 529 Plans so long as the funds are used for “qualified higher education expenses.” While originally withdrawn from 529 Plans to pay for qualified higher education expenses, the refunded amounts would no longer be used for such purpose and would potentially be subject to Iowa income taxation.
HF2641 provided that refunds of qualified higher education expenses from higher education institutions would not be subject to Iowa income taxation so long as all of the following conditions are met:
- The refund is re-contributed to the same 529 Plan from which the original withdrawal was made
- Re-contribution is made within sixty days of the date of the refund
- The re-contribution amount does not exceed the amount of the refund
The legislature also clarified that a taxpayer cannot take a deduction for the amount of the re-contribution. The taxpayer should have already taken the deduction at the time the original contribution was made.
We were hopeful the Iowa legislature would take action to align Iowa law relating to 529 Plans with federal law and are happy to see that conformity, as well as these other changes beneficial to Iowa taxpayers. Questions about 529 Plans should be directed to a qualified tax attorney to ensure you are in compliance with the new regulations.
