Tax Considerations

What federal income tax advantages does the Utah Educational Savings Plan (UESP) offer?

Expand View

Contributions to UESP accounts are not deductible for federal income tax purposes; however, earnings on investments in UESP accounts grow federally tax-deferred. Withdrawals used for qualified higher education expenses are exempt from federal income tax. There is no expiration date on tax-free withdrawals for qualified higher education expenses. The earnings portion of withdrawals used for non-qualified expenses are subject to federal income tax plus an additional 10% federal penalty tax. The additional federal penalty tax does not apply to non-qualified withdrawals due to the beneficiary’s death, disability, scholarship, or attendance at a military academy.


What Utah state income tax benefits does UESP offer?

Expand View

Investment gains in UESP accounts are not subject to Utah state income tax if the funds are used for the qualified higher education expenses of the beneficiary at an eligible educational institution.

Utah taxpayers/residents who are account owners, including Utah trusts, may take a tax credit on a portion of their contributions to UESP from Utah taxable income. Utah corporations may take a tax deduction on a portion of their contribution to UESP from Utah taxable income. No tax benefits are allowed to Utah taxpayers/residents for contributions to other 529 plans.

  • Utah individuals. The 2014 individual Utah state income tax credit amount is up to $1,860 in contributions per qualified beneficiary ($3,720 for joint filers) multiplied by 5%, equaling a maximum state tax credit of up to $93 per qualified beneficiary ($186 for joint filers). The credit does not phase out based on the taxpayer’s income. Married couples claiming the joint tax benefits are not required to have separate UESP accounts.
  • Utah trusts. The Utah state income tax credit for Utah trusts for 2014 is up to $1,860 in contributions per qualified beneficiary multiplied by 5%, equaling up to $93 per qualified beneficiary. A joint tax credit is not allowed for institutional accounts.
  • Utah corporations. Utah corporations are eligible for a state income tax deduction of up to $1,860 in contributions per qualified beneficiary. A joint tax benefit is not allowed for UESP institutional accounts.

You may contribute more or less than the above Utah state income tax benefit amounts. These amounts are the maximum allowable contributions for claiming your Utah state income tax benefits.

You can take advantage of these tax savings each year you contribute—for the life of the beneficiary—if the beneficiary on the account was designated as such before age 19.


What gift taxes are associated with UESP accounts?

Expand View

A special provision for Section 529 plans allows you to make a gift of up to $70,000 ($140,000 if married filing jointly) to a single beneficiary in one year without creating a taxable gift if you make a five-year averaging election on IRS Form 709. However, you cannot make any additional gifts to the beneficiary during the five-year period. The federal and state income gift and estate tax rules are complex. Please consult your tax adviser if you have any questions.


Will the value of my account be included in my estate?

Expand View

Funds invested in UESP are treated as a completed gift to the beneficiary for federal estate and gift tax purposes. Generally, the assets held in an account are not included as part of the account owner’s estate although the account owner remains in control of the funds. The federal and state income gift and estate tax rules are complex. Please consult your tax adviser if you have any questions.


Can I still claim the American Opportunity or Lifetime Learning Tax Credits on my tax return?

Expand View

Either an American Opportunity Tax Credit or a Lifetime Learning Tax Credit (together, the “Tax Credits”) may be taken in the same year that funds from a UESP account are withdrawn; however, federal regulations do not allow tax-exempt earnings from a UESP account to be used for these Tax Credits.

UESP funds may be allocated to room, board, books, and supplies that do not qualify for these Tax Credits. Other funding sources can be used to pay for tuition and required fees that do qualify for these Tax Credits. Any tax-free UESP earnings used to pay tuition and fees will reduce the amount eligible for these Tax Credits.


Important Legal Notice

You should read the Program Description and consider all investment objectives, risks, charges, and expenses before investing. The Program Description is available for download on the web or a hard copy can be mailed to you by requesting it online here.

FDIC Insurance. Except for the underlying investment specified below, investments in UESP are not insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance, up to applicable limits, is provided for the FDIC-insured accounts held in trust by UESP at Sallie Mae Bank and U.S. Bank National Association (U.S. Bank) (collectively Banks). Contributions to and earnings on the FDIC-insured accounts are allocated between the Banks according to the following percentages: Sallie Mae Bank (90 percent) and U.S. Bank (10 percent). Money in the FDIC-insured accounts is insured by the FDIC on a pass-through basis to each account owner at each Bank up to the maximum amount set by federal law, which is $250,000. The amount of FDIC insurance provided to an account owner is based on the total of (1) the value of an account owner’s investment in the FDIC-insured account at each Bank plus (2) the value of other accounts held (if any) at each Bank, as determined by the Banks and by FDIC regulations.

No Other Insurance and No Guarantees. Investments in UESP are neither insured nor guaranteed by the State of Utah, UESP, the Utah State Board of Regents, the Utah Higher Education Assistance Authority, other state agencies, federal government agencies (except to the extent noted above regarding FDIC insurance), or any employees or directors of any such entities. Units in UESP have not been registered with the United States Securities and Exchange Commission or with any state securities commission.

Account Value. The value of your UESP account may vary depending on market conditions and the performance of the UESP investment option you select. It could be more or less than the amount you contribute; in short, your investment could lose value. However, subject to the application of the rules and regulations of the Banks and the FDIC to each account owner, money in the FDIC-insured accounts will retain its value, whether in the FDIC-Insured investment option or when allocated to portions of another investment option that have the FDIC-insured accounts included as an underlying investment.

Non-Utah Taxpayers and Residents. You should determine whether the state in which you or your beneficiary pay taxes or live offers a 529 plan that provides state tax or other benefits not otherwise available to you by investing in UESP. You should consider such state tax treatment and benefits, if any, before investing in UESP.