Tax Type
Individual Income Tax
Description
Virginia College Savings Plan
Topic
Clarification
Date Issued
12-07-2000
December 7, 2000
Re: Ruling Request: Individual Income Taxes
Virginia College Savings Plan
Dear ****
This will reply to your request for a ruling from the department regarding the individual income tax deduction for the purchase of prepaid tuition contracts and contributions to a Virginia savings trust account. I apologize for the delayed response.
Code of Virginia § 58.1-322 (D)(7) (copy enclosed) was enacted by the 1998 General Assembly to create an individual income tax deduction for the purchaser of a Virginia prepaid tuition contract ("VPEP") with the Virginia College Savings Plan. The deduction per contract, per taxable year is limited to the lesser of the amount paid during the year, or $2,000. To the extent the purchase price or the amount paid during the year exceeds $2,000 per contract, the remainder may be carried forward and deducted in future taxable years, until the purchase price has been fully deducted. The deduction is effective for contracts purchased on or after January 1, 1996 (however, the deduction can only be claimed beginning with returns filed for taxable years beginning on and after January 1,1998). The deduction is subject to recapture in taxable years) in which an unqualified distribution or refund is made.
The 1999 General Assembly amended Code of Virginia § 58.1-322 (D)(7) to create an individual income tax deduction for contributors to a Virginia savings trust account ("VEST") with the Virginia College Savings Plan. The income tax deduction for contributors to VEST accounts is identical to the deduction for purchasers of VPEP contracts, and it is effective for taxable years beginning on and after January 1,1999. Also, the language was amended to clarify the identity of the purchaser or contributor for purposes of the income tax deduction, and to clarify the manner in which the deduction and recapture provisions are treated if ownership of a contract or account is transferred.
Finally, the deduction was also amended to allow purchasers of VPEP contracts who are age 70 or older to deduct the full amount paid for the purchase of a VPEP contract, and not be subject to the limitation of $2,000 per year, per contract. The accelerated deduction only applies to amounts not previously deducted, and is permitted in any taxable year in which the purchaser has attained the age of 70, regardless of the purchaser's age in the year in which the VPEP contract was purchased. The 2000 General Assembly extended the unlimited deduction allowed to purchasers of VPEP contracts, aged 70 or older, to savings trust accounts for taxable years beginning on and after January 1, 2000.
Code of Virginia § 23-38.75, as amended by the 1999 General Assembly (copy enclosed) defines purchaser (the "Purchaser") as "a person who makes or is obligated to make advance payments in accordance with a prepaid tuition contract and who is listed as the owner of the prepaid tuition contract." Pursuant to the Disclosure Statement issued by the Virginia Prepaid Education Program (copy enclosed), only one purchaser is allowed per contract. Further, the Master Agreement (copy enclosed) provides that a purchaser is "[the] person . . . who is or was obligated to make Payments under a Contract. The term 'purchaser' also applies to the designee of survivorship rights indicated on the Purchaser Acceptance Form upon the death of the original Purchaser or a transferee Purchaser . . . "
You have requested a ruling from the department with respect to the application of the individual income tax deduction provided by Code of Virginia § 58.1-322 (D)(7) to each of the scenarios set out in your ruling request. Each of your scenarios is addressed separately below.
I hope this information is helpful in determining the application of the individual income tax deduction for the purchase of a Virginia College Savings Plan. If you have any further questions or need additional information, please do not hesitate to contact **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18284B
Re: Ruling Request: Individual Income Taxes
Virginia College Savings Plan
Dear ****
This will reply to your request for a ruling from the department regarding the individual income tax deduction for the purchase of prepaid tuition contracts and contributions to a Virginia savings trust account. I apologize for the delayed response.
FACTS
Code of Virginia § 58.1-322 (D)(7) (copy enclosed) was enacted by the 1998 General Assembly to create an individual income tax deduction for the purchaser of a Virginia prepaid tuition contract ("VPEP") with the Virginia College Savings Plan. The deduction per contract, per taxable year is limited to the lesser of the amount paid during the year, or $2,000. To the extent the purchase price or the amount paid during the year exceeds $2,000 per contract, the remainder may be carried forward and deducted in future taxable years, until the purchase price has been fully deducted. The deduction is effective for contracts purchased on or after January 1, 1996 (however, the deduction can only be claimed beginning with returns filed for taxable years beginning on and after January 1,1998). The deduction is subject to recapture in taxable years) in which an unqualified distribution or refund is made.
The 1999 General Assembly amended Code of Virginia § 58.1-322 (D)(7) to create an individual income tax deduction for contributors to a Virginia savings trust account ("VEST") with the Virginia College Savings Plan. The income tax deduction for contributors to VEST accounts is identical to the deduction for purchasers of VPEP contracts, and it is effective for taxable years beginning on and after January 1,1999. Also, the language was amended to clarify the identity of the purchaser or contributor for purposes of the income tax deduction, and to clarify the manner in which the deduction and recapture provisions are treated if ownership of a contract or account is transferred.
Finally, the deduction was also amended to allow purchasers of VPEP contracts who are age 70 or older to deduct the full amount paid for the purchase of a VPEP contract, and not be subject to the limitation of $2,000 per year, per contract. The accelerated deduction only applies to amounts not previously deducted, and is permitted in any taxable year in which the purchaser has attained the age of 70, regardless of the purchaser's age in the year in which the VPEP contract was purchased. The 2000 General Assembly extended the unlimited deduction allowed to purchasers of VPEP contracts, aged 70 or older, to savings trust accounts for taxable years beginning on and after January 1, 2000.
Code of Virginia § 23-38.75, as amended by the 1999 General Assembly (copy enclosed) defines purchaser (the "Purchaser") as "a person who makes or is obligated to make advance payments in accordance with a prepaid tuition contract and who is listed as the owner of the prepaid tuition contract." Pursuant to the Disclosure Statement issued by the Virginia Prepaid Education Program (copy enclosed), only one purchaser is allowed per contract. Further, the Master Agreement (copy enclosed) provides that a purchaser is "[the] person . . . who is or was obligated to make Payments under a Contract. The term 'purchaser' also applies to the designee of survivorship rights indicated on the Purchaser Acceptance Form upon the death of the original Purchaser or a transferee Purchaser . . . "
You have requested a ruling from the department with respect to the application of the individual income tax deduction provided by Code of Virginia § 58.1-322 (D)(7) to each of the scenarios set out in your ruling request. Each of your scenarios is addressed separately below.
RULING
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- 1. A taxpayer lived in Virginia and paid state income tax during 1996 and 1997, but has since moved out of state, and will not be filing a 1998 Virginia income tax return. Can the taxpayer amend his 1996 and 1997 Virginia tax returns to take advantage of the deduction?
No. Code of Virginia § 58.1-322 (D) (7) specifically provides, "The amount paid for a prepaid tuition contract during taxable years beginning on or after January 1, 1996, but before January 1,1998, shall be deducted in taxable years beginning on or after January 1, 1998 . . ." (emphasis added.)
Accordingly, a taxpayer who purchased a prepaid tuition contract in 1996 or 1997 cannot amend the 1996 and 1997 Virginia returns to claim the deduction. The first year the deduction can be claimed is on the Virginia return filed for the 1998 taxable year. If the taxpayer, who has abandoned his Virginia domicile, still has Virginia source income, he would be entitled to claim the deduction on his Virginia nonresident income tax return.
2. A taxpayer is listed as the purchaser of a VPEP contract, but his mother is actually making the payments. Can the taxpayer take the deduction?
Only the purchaser may claim the deduction. Code of Virginia § 58.1-322 (D)(7) defines "purchaser" as "the person shown as such on the records of the Virginia College Savings Plan as of December 31 of the taxable year." Assuming the mother is not listed as the purchaser of the contract on December 31 of the taxable year in which the payments are made, she would not be entitled to a deduction for any payments she made.
3. A taxpayer is listed as the purchaser of a VPEP contract, but his aunt is making half of the payments and has the canceled checks. Can the taxpayer and the aunt split the deduction?
No. See Item 2, above. Only the purchaser may claim the deduction. Since the aunt is not listed as the purchaser of the contract, she would not be entitled to a deduction for any payments she made.
4. A taxpayer purchased a VPEP contract in 1996, and paid a lump sum that year. In 1997, the taxpayer transferred the contract to an ex-spouse as part of a divorce settlement, and the ex-spouse is now listed on VPEP records as the purchaser. Which party can take the deduction, and is it possible to split the deduction even though they are not filing joint tax returns now? This issue was not covered in the divorce settlement.
See Item 2, above. Only the purchaser may claim the deduction. Code of Virginia § 58.1-322(D)(7) provides, "[i] In the case of a transfer of ownership of a prepaid tuition contract . . . the transferee shall succeed to the transferor's tax attributes . . . including . . . [the] carryover and recapture of deductions." Consequently, once a contract is transferred, only the new purchaser may claim the deduction.
5. A taxpayer purchased a VPEP contract in 1997 and made payments until last month when it was transferred to the taxpayer's sister, who is now listed as the purchaser on VPEP records. The sister is now making the monthly payments. Can the taxpayer still deduct the payments made when the taxpayer was the purchaser? If so, what documentation will the taxpayer need? Can the sister, who is now the purchaser and is making payments, take the deduction for the payments she has made to date?
The amount paid for a VPEP contract during the 1996 and 1997 taxable years may be deducted in taxable years beginning on or after January 1, 1998. The purchaser who may take the deduction is the person listed as the purchaser on the VPEP records as of December 31 of the taxable year. Assuming the sister was listed as the purchaser as of December 31, 1998 on VPEP's records, she would be able to claim the payments made in 1997 in taxable year 1998.
6. A taxpayer bought three VPEP contracts in 1996, and paid a lump sum for all of them. The taxpayer has approximately $48,000 to deduct from his Virginia state taxable income at a rate of $6,000 per year. The taxpayer's employer routinely transfers employees every five years, so the taxpayer is scheduled to be transferred in two years. What happens to the carry-forward amount if the taxpayer moves out of state?
The deduction is only available on the Virginia income tax return, and there is no provision for an acceleration of the deduction, unless the taxpayer has attained age 70. If the taxpayer, who abandoned his Virginia domicile, still has Virginia source income, he would be entitled to claim the deduction on his Virginia nonresident income tax return.
7. A taxpayer is assessed Virginia state income tax for the last two years. Can the taxpayer use the deduction to reduce delinquent taxes?
No. The deduction is an adjustment which reduces Virginia taxable income on an annual basis. The tax benefit derived from the deduction cannot be used to offset delinquent taxes.
8. A taxpayer's mother purchased a contract in 1997 and paid a lump sum. The mother died in June of 1998, and the taxpayer was the designee of survivorship rights. Can the taxpayer take the remaining tax deduction for this contract?
Yes. See Item 5, above. Pursuant to the Master Agreement, "the term 'purchaser' also applies to the designee of survivorship rights indicated on the Purchaser Acceptance Form upon the death of the original Purchaser or a transferee Purchaser . . . " As of December 31, 1998, the taxpayer would be the purchaser on VPEP's records according to the Master Agreement. The taxpayer would be entitled to claim a deduction for the VPEP contract for the 1997 taxable year.
9. A taxpayer's father-in-law bought a VPEP contract for the taxpayer's son in 1996 and was making monthly payments. The father-in-law died in June 1997 and the taxpayer took over the contract payments as the new purchaser. Can the taxpayer begin taking the tax deduction for the payments the taxpayer is now making?
Yes. See Item 8, above. The taxpayer, as the designated survivor and new purchaser, would be entitled to deduct any current payments as well as any previously undeducted amounts.
10. A husband and wife are getting a divorce. The couple have three VPEP contracts for their children. The wife is the purchaser of two of the contracts, and the husband is the purchaser of the other one. If the wife transfers two years of the second contract to the husband, can each spouse take the deduction for the payments they are making?
See Item 2, above. The taxpayer who is listed as the purchaser of each of the three contracts as of December 31 would be entitled to claim the deduction for such contract in such year. Accordingly, beginning with the taxable year in which one of the wife's contracts was transferred, the husband, as the new purchaser, would be entitled to claim a deduction for the transferred contract (including any previously undeducted amounts) and the original contract he purchased. The wife would only be entitled to claim a deduction for the remaining contract she did not transfer.
11. Can a taxpayer who does not itemize deductions still take advantage of this deduction?
Yes. The deduction is an adjustment which reduces Virginia taxable income. It currently has no effect on federally itemized deductions (Schedule A). Accordingly, to the extent a taxpayer has federal adjusted gross income, he would be able to claim the deduction.
12. A taxpayer purchased a VPEP contract in 1996 for his grandchild. The taxpayer is retired and on a fixed income, and does not incur Virginia state income tax. Can the taxpayer get a refund of the equivalent value of the deduction for which the taxpayer would otherwise be eligible?
No. The deduction is an adjustment which reduces Virginia taxable income. The tax benefit derived from the deduction cannot be refunded to the taxpayer.
However, if the taxpayer was age 70 or older and had sufficient income to incur Virginia state income tax, he would be able to deduct the entire amount contributed to the contract, even if it exceeded $2,000 in the 1996 taxable year.
13. Can a married couple filing a joint return split a four-year VPEP contract, and thereby accelerate their ability to deduct the purchase price of their contracts under the following examples?
Yes. The couple may split a four year VPEP contract and deduct the purchase price of their contracts depending upon the facts. The following three examples provide different fact scenarios in which a married couple may split a contract and deduct the purchase price. In all of the responses below, it is assumed that the payment amounts or the carry forward amounts are equal to, or greater than $2,000 per year per contract. It is also assumed that neither purchaser has attained age 70.
A. Mrs. Jones buys a four-year contract for the couple's daughter, and Mr. Jones buys a four-year contract for their son. Would each purchaser be entitled to a deduction of up to $2,000 each year per contract, for a total deduction of up to $4,000 per year on their joint return?
Yes. The purchaser is entitled to deduct the amounts paid during the year, limited to a maximum yearly deduction of $2,000 per contract. Accordingly, in the above example, Mr. and Mrs. Jones would each be entitled to a maximum deduction of $2,000 per year, or a total deduction of up to $4,000 per year on their jointly filed return.
B. However, if Mr. Jones purchases a two-year contract for each child, and Mrs. Jones does the same, each parent will own two independent contracts. Would Mr. and Mrs. Jones be able to deduct up to $8,000 from their Virginia taxable income each year because the deduction is limited to $2,000 per contract per purchaser, and each of the parents now owns two contracts?
Yes. As the purchaser of two separate two-year contracts, the wife would be entitled to deduct the amounts paid during the year for such contracts, up to a maximum total deduction of $4,000 per taxable year. As the purchaser of two additional two-year contracts, the husband would also be entitled to deduct the amounts paid during the year for such contracts up to a maximum total deduction of $4,000. If the husband and wife filed a joint income tax return, a deduction of up to $8,000 could be claimed for the four separate two-year contracts.
C. If Mrs. Jones buys a four-year contract for the couple's daughter and Mr. Jones buys a four-year contract for their son, and then one of the parents transfers two years of the contract to the other spouse to create four contracts. Could Mr. and Mrs. Jones then deduct up to $8,000 from their Virginia taxable income each year on their jointly filed return?
If the husband and wife each purchased one four-year contract, each spouse would be entitled to deduct up to $2,000 per taxable year for payments made on each such contract as the purchaser. Accordingly, if the husband and wife filed a joint income tax return, a deduction of up to $4,000 could be claimed for the two separate four-year contracts.
If the wife then transfers the contract she purchased to the husband, the husband would then be the purchaser of two contracts. As the new purchaser, the husband would only be entitled to deduct the payments he personally made after he became the new purchaser of the contract, up to $2,000 per contract per taxable year. Accordingly, the husband would be entitled to deduct up to $4,000 per taxable year for the two contracts, whether he filed jointly or separately.
14. What will happen with regard to the recapture provision if a purchaser either moves out of state or is not a Virginia resident and cancels his or her contract for a reason other than the beneficiary's death, disability, or receipt of a scholarship?
A taxpayer is required to recapture (or add-back) previously deducted amounts during the taxable year or years in which an unqualified distribution or refund is made. A nonresident taxpayer is only subject to Virginia taxation to the extent he has Virginia source income. Code of Virginia § 58.1-302 defines income from Virginia sources as:
1. Items of income, gain, loss and deduction attributable to:
a. The ownership of any interest in real or tangible personal property in Virginia;
b. A business, trade, profession or occupation carried on in Virginia; or
c. Prizes paid by the Virginia Lottery Department, and gambling winnings from wagers placed or paid at a location in Virginia.
2. Income from intangible personal property, including annuities, dividends, interest, royalties and gains from the disposition of intangible personal property to the extent that such income is from property employed by the taxpayer in a business, trade, profession or occupation carried out in Virginia.
- 1. A taxpayer lived in Virginia and paid state income tax during 1996 and 1997, but has since moved out of state, and will not be filing a 1998 Virginia income tax return. Can the taxpayer amend his 1996 and 1997 Virginia tax returns to take advantage of the deduction?
I hope this information is helpful in determining the application of the individual income tax deduction for the purchase of a Virginia College Savings Plan. If you have any further questions or need additional information, please do not hesitate to contact **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18284B
Rulings of the Tax Commissioner