Modifying the individual income tax treatment for contributions to and withdrawals from a college savings account and modifying an administrative rule of the Department of Financial Institutions related to the college savings program. (FE)

Contributions to an account have certain tax advantages under federal and state law.

The bill makes the following changes to the state individual income tax treatment for contributions to and withdrawals from 529 accounts:

1. Increases the maximum contribution amount an individual may deduct from the contributor's income. Under current law, the maximum amount for 2019 is $3,280 (or $1,640 for each contributor who is married and files separately) and is indexed for inflation. The bill increases the maximum amount to $5,000 (or $2,500 for each contributor who is married and files separately) and eliminates indexing.

The bill also eliminates a provision under current law that limits the maximum deduction amount for divorced parents to $1,640 for each former spouse.

2. Modifies the contribution deadline for state tax purposes. Under current law, a contribution made during a taxable year, or on or before April 15 following the end of the taxable year, may be deducted from the contributor's income for the taxable year. The bill provides that a contribution for a taxable year must be made on or before the date on which the contributor is required to file the contributor's state income tax return, not including any extension, for the taxable year.

3. Modifies the 365-day restriction under current law that applies to account withdrawals. Under current law, any amount withdrawn from an account within 365 days of the day on which the amount was contributed to the account must be added to income if the amount was previously deducted from income. The bill limits the 365-day restriction to apply only to withdrawn amounts that were rolled over to the account from another state's qualified tuition program within 365 days of withdrawal.

4. Modifies the 365-day restriction under current law with respect to carry-overs. Under current law, a contribution to an account in excess of the maximum deduction amount may be carried forward to future taxable years, but the carry-over is not allowed if the carry-over amount was withdrawn from the account within 365 days of the day on which the amount was contributed to the account and if the amount was previously deducted from income. The bill limits the 365-day restriction with respect to carry-overs to apply only to withdrawn amounts that were rolled over to the account from another state's qualified tuition program within 365 days of withdrawal.

5. Requires the use of a first in, first out method of accounting for purposes of the 365-day restrictions described under items 3 and 4 and for purposes of other additions to income under current law that relate to account withdrawals.

The federal Tax Cuts and Jobs Act of 2017 amended the definition of “qualified higher education expense” under federal law for purposes of state qualified tuition programs. Under the current federal definition, 529 accounts may be used to pay for expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. The bill modifies the definition of “qualified higher education expense” in the state individual income tax law to conform to the definition under federal law. The bill also modifies an administrative rule of DFI to conform that definition to federal law.