Tax Considerations

What federal tax advantages does the Utah Educational Savings Plan (UESP) offer?
Are there Utah tax benefits?
Can I still take the Hope or Lifetime Learning Credit on my tax return?
What gift taxes are associated with UESP accounts?
Will the value of my account be included in my estate?


What federal tax advantages does the Utah Educational Savings Plan (UESP) offer?
Contributions to UESP accounts are not deductible for federal income tax purposes. However, earnings on investments in UESP accounts grow federally tax-deferred as long as the funds are used for qualified higher education expenses of the beneficiary at an eligible educational institution. Withdrawals from an account will generally not be subject to federal income tax. UESP funds used to pay qualified higher education expenses are free from federal income tax. There is no expiration date for tax-free withdrawals for qualified higher education expenses. Congress amended the law (Section 529 of the Internal Revenue Code of 1986) in August 2006, making this benefit permanent.

Earnings used for non-qualified expenses are subject to federal income tax, plus an additional 10% federal penalty tax. The additional federal penalty tax will not apply to non-qualified withdrawals due to the beneficiary's death, disability, scholarship, or attendance at a military academy.

Are there Utah tax benefits?
Investment gains in UESP accounts are not subject to Utah state income tax as long as the funds are used for the qualified higher education expenses of the beneficiary. Utah taxpayers who are account owners have additional state tax benefits.

Utah Individuals: The 2009 individual Utah state tax credit is up to $1,740 in contributions per beneficiary multiplied by five percent, equaling $87.00 per beneficiary. If filing jointly, the maximum credit is $3,480 in contributions multiplied by five percent, equaling $174.00 per beneficiary. The credit does not phase out based on the taxpayer’s income. Married couples taking the tax benefits are not required to have separate UESP accounts.

Utah Trusts: The Utah tax credit for Utah trusts for 2009 is up to $1,740 in contributions per beneficiary multiplied by five percent, equaling $87.00 per beneficiary. A joint tax credit is not allowed for institutional accounts.

Utah Corporations: Utah corporations are eligible for a tax deduction equal to $1,740 in contributions per beneficiary. A joint tax benefit is not allowed for UESP institutional accounts.

You can take advantage of these tax savings each year you contribute—for the life of the beneficiary—if the beneficiary was younger than 19 when the account was opened.

Can I still take the Hope or Lifetime Learning Credit on my tax return?
Either a Hope or Lifetime Learning Credit may be taken in the same year that funds from a UESP account are withdrawn for a beneficiary; however, federal regulations do not allow tax-exempt earnings from a UESP account to be used for these credits. UESP funds may be allocated to room, board, books, and supplies which do not qualify for these credits. Other funds can be used to pay for tuition and required fees which do qualify for these credits. Any tax-free UESP earnings used to fund tuition and fees will reduce the amount eligible for these credits.

What gift taxes are associated with UESP accounts?
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. Because the funds are considered to be a completed gift, gift tax and generation-skipping transfer tax rules apply. The federal and state income gift and estate tax rules are complex. Consult your tax adviser if you have any questions.

Will the value of my account be included in my estate?
Section 529 allows you to make a gift of up to $65,000 ($130,000 if filing jointly) to a single beneficiary in one year without creating a taxable gift if you make an averaging election to treat the entire gift as a series of five equal annual gifts. This is accomplished through a five-year averaging election made on the federal gift tax return, IRS Form 709. However, you cannot make any additional gifts to the beneficiary during the five-year period. If you die before the five-year period has elapsed, the portion of the contribution allocated to calendar years remaining in the five-year period after your death are included in the your estate for estate tax purposes.

The federal and state income gift and estate tax rules are complex. Consult your tax adviser if you have any questions.

 

 

© 2009 Utah State Board of Regents, all rights reserved.
The terms Utah Educational Savings Plan and UESP are registered service marks.

Investors 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 from this Web site.

FDIC Insurance. Except for the underlying investment specified below, investments in UESP are not insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance is provided for the FDIC-insured savings account held in trust by UESP at Zions First National Bank (Bank). Funds in the savings account are insured by the FDIC on a pass-through basis to each account owner up to the maximum amount set by federal law—currently $250,000 through December 31, 2013, and $100,000 thereafter. 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 UESP’s FDIC-insured savings account plus (2) the value of other accounts held (if any) at the Bank, as determined by the Bank and by FDIC regulations.

No Other Insurance and No Guarantees. Investments in UESP are not 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 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 Bank and FDIC rules and regulations to each account owner, funds in UESP’s FDIC-insured savings account will retain their value, whether in Option 11 or when allocated to portions of Options 2, 7, 8, and 9.

Non-Utah taxpayers and residents should determine whether the state in which they or their beneficiary live or pay taxes offers a 529 plan that provides state tax or other benefits not otherwise available to them through UESP.

 

For more details about how our plan works, download a copy of our Program Description.

Click here to download a pdf.
Click here to request a mailed copy.