26 U.S.C. § 529 — Qualified tuition programs

(a) General rule. A qualified tuition program is exempt from tax under this subtitle, but remains subject to section 511 taxes on unrelated business income of charitable organizations.

(b) Qualified tuition program. (1) In general. A “qualified tuition program” is a program established and maintained by a State, its agency or instrumentality, or one or more eligible educational institutions. Under it, a person may (i) buy tuition credits or certificates for a designated beneficiary that waive or pay the beneficiary’s qualified higher-education expenses, or (ii), for a State program, contribute to an account established to pay those expenses. The program must meet this subsection’s other requirements. Unless regulations provide otherwise, an institution program qualifies only if it holds amounts in a qualified trust and has received a ruling or determination that it meets the program requirements. A “qualified trust” is a United States trust created or organized exclusively for designated beneficiaries that meets section 408(a)(2) and (5). (2) Cash contributions. Contributions must be cash, subject to the limits and exceptions stated in this section. (3) Separate accounting. The program must separately account for each designated beneficiary. (4) Limited investment direction. A beneficiary may direct investments of contributions or earnings no more than twice in a calendar year. (5) No pledging. An interest in the program may not secure a loan. (6) Additional requirements. The program must meet the contribution, beneficiary, and other requirements stated in this subsection.

(c) Tax treatment. (1) Distributions. (A) A distribution is included in the recipient’s gross income under section 72, unless another chapter provision excludes it. (B) For qualified higher-education expenses, in-kind benefits are excluded if paying for them directly would be a qualified expense. For other distributions, none is included when the distribution does not exceed qualified expenses after subtracting in-kind expenses; otherwise the includible amount is reduced in the same ratio that those expenses bear to the distributions. (C) For taxable years beginning before January 1, 2004, these rules do not apply to a distribution from an institution program. (D) A benefit furnished to a designated beneficiary is treated as a distribution to that beneficiary. (E) Expenses used for American Opportunity or Lifetime Learning credits are reduced as section 25A(g)(2) provides and by expenses used to calculate a section 25A credit. (F) If distributions from tuition programs and Coverdell accounts exceed qualified expenses, the taxpayer^* allocates expenses among the distributions to determine exclusions. (2) An amount contributed above section 2503(b)’s limit may, at the donor’s election, be spread evenly over the five calendar years beginning with the contribution year. (3) A rollover within 60 days to another tuition program for the beneficiary, to a family member’s beneficiary account, or to an ABLE account for the beneficiary or a family member is not taxable. The ABLE rollover cannot exceed the section 529A(b)(2)(B)(i) limit after other yearly contributions. Changing to a family-member beneficiary is not a distribution. A tuition-program rollover to another program is unavailable if made within 12 months after a previous such transfer. A refunded qualified expense may be recontributed within 60 days, up to the refund. A distribution from a program maintained for 15 years may be directly transferred to the beneficiary’s Roth IRA^*, without tax, up to contributions and related earnings made before the five-year period ending on distribution. This exception is limited annually by section 408A(c)(2), reduced by that year’s individual-retirement-plan contributions, and limited to $35,000 over the beneficiary’s lifetime. (4) Estate tax. An interest is not included in an individual’s gross estate merely because of the interest, except amounts distributed because a beneficiary died. If a donor elected five-year spreading and dies before that period ends, the donor’s estate includes the part allocable to periods after death. (5) Gift tax. Distributions are not taxable gifts. A change to a new beneficiary or rollover to a new beneficiary is subject to chapters 12 and 13 unless the new beneficiary is in the same or a higher generation under section 2651 and is a family member. (6) The section 530(d)(4) additional tax applies to tuition-program payments and distributions as it applies to Coverdell accounts, except not to qualifying distributions in taxable years beginning before January 1, 2004. (7) “Qualified higher education expense” includes, for elementary or secondary public, private, or religious schools, (A) tuition, (B) curriculum and materials, (C) books and instructional materials, (D) online materials, (E) qualifying tutoring or outside educational classes, including only a nonrelated tutor or instructor who is a State-licensed teacher, has taught at an eligible institution, or is a subject-matter expert, (F) fees for nationally standardized achievement tests, advanced-placement exams, or college-admission exams, (G) dual-enrollment fees, and (H) qualifying educational therapies for students with disabilities. (8) It includes fees, books, supplies, and equipment required for a registered and certified apprenticeship under the National Apprenticeship Act. (9) It includes principal or interest on a qualified education loan of the beneficiary or a sibling. For each individual, distributions treated this way cannot exceed $10,000 minus amounts so treated in prior years. For siblings, the amounts are accounted for with the sibling, not the designated beneficiary; “sibling” means a person with a relationship described in section 152(d)(2)(B).

(d) Reports. Program officers or their designees must report contributions, distributions, and other required matters to the Secretary^* and beneficiaries, at the times and in the manner the Secretary requires. For a subsection (c)(3)(E) rollover, they must report to the Roth IRA trustee the program’s contributions, distributions, and earnings as of the distribution date and other required matters.

(e) Other definitions and special rules. (1) “Designated beneficiary” is the person named when participation begins, a new beneficiary under subsection (c)(3)(C), or a person receiving an interest as a scholarship under a program purchased by a government or a section 501(c)(3) tax-exempt organization. (2) “Member of the family” means the beneficiary’s spouse; a person related under section 152(d)(2)(A) through (G); the spouse of such a person; or the beneficiary’s first cousin. (3) “Qualified higher education expenses” means (A)(i) required tuition, fees, books, supplies, and equipment at an eligible institution, (ii) special-needs services for a special-needs beneficiary connected with attendance, and (iii) primarily beneficiary-used computer or peripheral equipment, software, Internet access, and related services during enrollment, but not sports, game, or hobby software unless predominantly educational. Cash distributions from all State account programs may include no more than $20,000 per year of subsection (c)(7) expenses. (B) For an eligible student, it includes reasonable room and board costs while attending the institution. The amount is capped at the institution’s cost-of-attendance room-and-board allowance, or, if greater, the actual invoice for institution-owned or operated housing. (C) It includes qualified postsecondary credentialing expenses under subsection (f). (4) An interest in a program is not debt for section 514. (5) An “eligible educational institution” is an institution described in section 481 of the Higher Education Act as in effect on the stated enactment date and eligible for a title IV program.

(f) Qualified postsecondary credentialing expenses. (1) These are (A) tuition, fees, books, supplies, equipment, and other subsection (e)(3)(A)-type expenses for a recognized postsecondary credential program, (B) required testing fees, and (C) required continuing-education fees. (2) A recognized credential program is a program to obtain such a credential that is (A) on a State list under Workforce Innovation and Opportunity Act section 122(d), (B) in the Veterans Benefits Administration’s WEAMS public directory or its successor, (C) recognized by an organization widely regarded as providing reputable occupational credentials when that organization requires an exam and recognizes the program as preparation for it, or (D) identified by the Secretary after consulting the Labor Secretary as reputable. (3) A recognized credential is (A) an industry-recognized postsecondary employment credential issued by a program accredited by the Institute for Credentialing Excellence, National Commission on Certifying Agencies, or American National Standards Institute; listed in the Defense Department or Armed Forces COOL directory or successor; or identified by the Secretary after consulting the Labor Secretary, (B) a completed apprenticeship certificate registered and certified by the Labor Secretary under the National Apprenticeship Act, (C) a State or Federal occupational or professional license, including a certification required to obtain one, or (D) a Workforce Innovation and Opportunity Act section 3(52) credential provided through a program described in paragraph (2)(A).

(g) Regulations. The Secretary must issue regulations needed or appropriate to carry out this section and prevent abuse, including regulations under chapters 11, 12, and 13.

(b)(2) Cash contributions. A program does not qualify unless purchases or contributions may be made only in cash. (3) Separate accounting. It must separately account for each designated beneficiary. (4) Limited investment direction. A contributor or designated beneficiary may directly or indirectly direct investments of contributions or earnings no more than twice in a calendar year. (5) No pledging of interest as security. The program may not allow an interest or part of an interest to secure a loan. (6) Prohibition on excess contributions. The program must have safeguards against contributions for a beneficiary exceeding what is needed for that beneficiary’s qualified higher-education expenses. (c)(1) General rule. Unless this subsection provides otherwise, no amount is included in the gross income of a designated beneficiary or contributor because of a distribution or earnings under the program.