One other item in here which gives me concern. I had to call back to get some clarification on some points. The representative on the phone said I should check with my tax consultant (I love how they assume I have one. I’ll be sure to ask Turbotax.) about the potential recapture of state tax deductions. I did receive NY state tax deductions for my contributions. The person really wasn’t sure and sounded like he was reading off of a script. Anyone have any thoughts as to whether this change of ownership would constitute a tax deduction recapture?
It does makes sense that NY state would want to recapture your state tax deductions. I do not know the answer, but I recommend you do consult a tax professional to assist you thru this process.
From the Change of Ownership Form for New York’s 529 College Savings Program Direct Plan:
Note: The current account owner must disclose to the new account owner any previous New York State tax deductions taken for contributions to the account listed in Section 1. If the new account owner takes a withdrawal, he or she will be liable for any previous New York State tax deductions taken by the current account owner if those deductions are subject to recapture, including in the case of nonqualified withdrawals and rollovers to a non-New York 529 Program plan. The new account owner’s liability for such deductions applies even if he or she isn’t a New York State resident; consult a tax advisor for guidance.
https://cdn.unite529.com/jcdn/files/NYD/pdfs/ChangeOwnership.pdf
I’m taking a guess that this is the New York plan that you are invested in. And you again get the wonderful suggestion to consult a tax advisor. You’re not going to get the kind of information here that you are asking for that you can rely on.
Usually recapture is an issue only if you’re rolling to another state’s plan or if you take a non-qualified distribution. Since there’s no official federal guidance on what you’re doing, there’s unlikely to be any state guidance, either.
Here’s the wording on the form. This does not seem like any big deal. Sounds like the recpature rules just transfer to the new owner.
"The current account owner must disclose to the new account owner any previous New York State tax deductions taken for contributions to the account listed in Section 1. If the new account owner takes a withdrawal, he or she will be liable for any previous New York State tax deductions taken by the current account owner if those deductions are subject to recapture, including in the case of nonqualified withdrawals and rollovers to a non-New York 529 Program plan. The new account owner’s liability for such deductions applies even if he or she isn’t a New York State resident; consult a tax advisor for guidance. "
This is interesting because wouldn’t it be advantageous if you were going to have a recapture situation (or maybe even a non-qualified withdrawal) for the account owner to be the child for the lower tax rate?
I guess my post was being posted around the same time as a couple of others. Yeah, I understand what you guys are saying. I appreciate the responses.
After doing some more research, I decided to do this (convert part of my younger children’s 529 to a child owned 529 in order to get more financial aid for my older child in college at a meets full need school). I believe there is no recapture of NY state taxes. I spoke to the NY 529 program another couple of times on the issue. The main comment they said was that any recapture was for those moving the 529 out of state and unqualified withdrawals. As for the gift tax issue, they were pretty firm that it was not a new gift. It did not make sense to me that money could be gifted twice to the same person.
I decided to do this with about $80K. If my daughter goes to our state school, a possibility, then the $80K would cover the withdrawals (taking the AOTC into account). If she goes to a more expensive school (within our budget), then we will first use up her child owned 529 plan.
Thanks again for any help
I’m surprised that a 529 plan rep. gave you advice that comes even close to anything tax related.
Well, he did preface it with it is not tax advice and that I should consult a tax person. To be honest, and maybe this is not the best way to make decisions, both items seem intuitively clear. On the transfer ownership form itself that is quoted above, it specifically mentions moving the 529 to another state and unqualified withdrawals. Yes, it also says “including in the case” referencing those items and that may imply there are other cases. However, I would think since I live in NY with my child, there really is no issue. If all transfer of ownerships triggered a recapture, I would think they would put that in the form. On the gift tax, I stated would I think. Even if I’m wrong on that one, the worst case is I am told to fill out a gift tax form. There still would be no tax due.
I understand this is getting perhaps too deep into tax issues. I just wanted to mention what I did and was told in case anyone else is interested in doing this. At least this could be a starting point.