Tax Type
Individual Income Tax
Description
Qualified Virginia College Savings Plans
Topic
Clarification
Federal Conformity
Records/Returns/Payments
Subtractions and Exclusions
Taxable Transactions
Date Issued
10-01-2010
October 1, 2010
Re: Ruling Request: Virginia College Savings Plan (VCSP) Deductions
Dear *****:
This is in response to your letter requesting a ruling on whether each of the transactions detailed below is entitled to an individual income tax deduction pursuant to Va. Code § 58.1-322(D)(7).
FACTS
The Virginia Savings College Plan ("VSCP") has established a number of college savings options, including the Virginia Education Savings Trust ("VEST") and CollegeAmerica.
VEST is a qualified tuition program for purposes of Internal Revenue Code § 529 that allows individuals to open and invest in savings trust accounts. VEST account owners may choose to invest in a number of portfolios. Account owners own units of the portfolios in which they invest, but do not own shares of the underlying funds. An account owner is permitted to own multiple accounts, provided that either the beneficiary or portfolio is different for each account. The VEST Program Description defines an "account" as "the separate VEST Account set up for each investment by a different Account Owner in a Portfolio." The Program Description also states that each investment by the same account owner establishes a separate account, provided the account owner, beneficiary, or the portfolio is different. A VEST account owner cannot establish multiple accounts for the same beneficiary in the same portfolio.
CollegeAmerica is a qualified tuition program that allows individuals to create savings trust accounts through VCSP's partnership with the mutual fund company American Funds. An individual interested in a CollegeAmerica account may complete a new account application, which allows the individual to designate the fund(s) in which he will invest. CollegeAmerica account owners may choose to invest in one or more mutual funds. The CollegeAmerica Program Description defines an "account" as "a CollegeAmerica Account opened by an Account Owner on behalf of a Beneficiary." Each account may contain several funds, each of which may be assigned a different number for purposes of purchasing or exchanging shares.
A ruling has been requested as to the tax treatment of several transactions related to VEST and CollegeAmerica funds. For purposes of each transaction, Taxpayer is a parent who has established and contributed to one or more college savings accounts under VCSP for the benefit of his minor child. For all relevant times, Taxpayer is a resident of Virginia and is under the age of 70 years old. Prior to addressing each transaction, I will describe the applicable law.
DETERMINATION
Deduction Generally Allowed for Contributions to Savings Trust Accounts
Virginia Code § 58.1-322(D)(7)(a) provides that:
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- A deduction shall be allowed to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan, pursuant to Chapter 4.8 (§ 23-38.75 et seq.) of Title 23. Except as provided in subdivision (7)(c), the amount deducted on any individual income tax return in any taxable year shall be limited to $4,000 per prepaid tuition contract or savings trust account.
No deduction is permitted if "such payments or contributions are deducted on the purchaser's or contributor's federal income tax return." Va. Code § 58.1-322(D)(7)(a). Currently, there is no federal deduction for contributions to IRC § 529 college savings plans.
If the purchase price exceeds $4,000 per contract or savings trust account, the taxpayer is permitted to carry forward the excess amount in future taxable years until the purchase price or savings trust contribution has been fully deducted. Va. Code § 58.1-322(D)(7)(a).
Definition of "Savings Trust Account"
Virginia Code § 23-38.75 defines a "savings trust account" as follows:
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- [A]n account established by a contributor pursuant to this chapter on behalf of a qualified beneficiary in order to apply distributions from the account toward qualified higher education expenses at eligible educational institutions, both as defined ins § 529 of the Internal Revenue Code of 1985, as amended, or other applicable federal law.
A savings trust account is established by a savings trust agreement, which is entered into by the Board of VCSP and a contributor. Va. Code § 23-38.75.
Transaction #1
Taxpayer invested $5,000 into a VEST account in 2009. No other contributions to a college savings account were made by Taxpayer in 2009. Taxpayer seeks a determination as to the tax treatment of this contribution.
Virginia Code § 58.1-322(D)(7)(a) allows a taxpayer to take an annual deduction equal to $4,000 per savings trust account. Therefore, assuming that Taxpayer is the owner of the account, he is permitted to take a deduction equal to $4,000 in 2009. Pursuant to Va. Code § 58.1-322(D)(7)(a), he is permitted to carry forward the remaining $1,000 deduction to the following taxable year.
Transaction #2
Taxpayer invested $5,000 each into two separate VEST portfolios in 2009. No other contributions to a college savings account were made by Taxpayer in 2009. Taxpayer seeks a determination as to the tax treatment of these contributions.
The VCSP provides that each investment by the same account owner establishes a separate VEST account if the account owner, beneficiary, or portfolio is different. Based on the information provided by the Taxpayer, it appears that the two portfolios are different. Assuming this is true, the portfolios would be treated as two separate VEST accounts.
Pursuant to Va. Code § 58.1-322(D)(7)(a), a taxpayer is permitted to take a deduction equal to $4,000 per savings trust account. Therefore, assuming that Taxpayer is the owner of both accounts, he is entitled to an $8,000 deduction in 2009. He is permitted to carry forward the remaining $2,000 deduction to the following taxable year. Please note that this outcome would be different if the VSCP treated the two portfolios as one account
Transaction #3
Taxpayer invested $5,000 into a CollegeAmerica savings trust account in 2009. No other contributions to a college savings account were made by Taxpayer in 2009. Taxpayer seeks a determination as to the tax treatment of this contribution.
Virginia Code § 58.1-322(D)(7)(a) allows a taxpayer to take an annual deduction equal to $4,000 per savings trust account. Therefore, assuming that Taxpayer is the owner on the account, Taxpayer is permitted to take a deduction equal to $4,000 in 2009. He is permitted to carry forward the remaining $1,000 deduction to the following taxable year.
Transaction #4
Taxpayer has one CollegeAmerica account that contains two separate funds. Taxpayer invested $5,000 into each of the two funds in 2009. No other contributions to a college savings account were made by Taxpayer in 2009. Taxpayer seeks a determination as to the tax treatment of these contributions.
Based on the information provided by the Taxpayer, it appears that he invested in two separate funds through a single CollegeAmerica account. Accordingly, he contributed $10,000 to one CollegeAmerica savings trust account and, assuming that Taxpayer is the owner on the account, he is permitted to take a deduction equal to $4,000 for taxable year 2009. He may then take a $4,000 deduction in taxable year 2010 and a $2,000 deduction in taxable year 2011.
Transaction #5
Taxpayer invested $2,000 in a VEST fund in 2002. No other contributions to a college savings plan were made by Taxpayer from 2002 through 2008. Taxpayer claimed a deduction of $2,000 in 2002. In 2009, Taxpayer rolled over $2,000 from the VEST fund to a CollegeAmerica fund. At the time of the rollover, the VEST fund was worth $4,000.
Taxpayer seeks a determination as to whether a deduction is allowed for the amount of the rollover contribution. Alternatively, Taxpayer seeks a determination as to whether a deduction would be allowed for a rollover of the entire $4,000 from the VEST fund into the CollegeAmerica fund.
For federal tax purposes, earnings from the transfer of an existing IRC § 529 qualified tuition plan to another IRC § 529 qualified tuition plan are excluded from federal adjusted gross income. Because Virginia uses federal adjusted gross income as a base for determining Virginia taxable income, Va. Code § 58.1-322(A), qualified rollovers are also excluded from Virginia taxable income. Furthermore, in order to take a deduction, the amount to be deducted must have been included in Virginia adjusted gross income. See Va. Code § 58.1-322(D). Accordingly, no additional deduction is permitted for the rollover of earnings and contributions from existing VCSP savings trust accounts.
Assuming that Taxpayer met the federal requirements of IRC § 529, the earnings rolled over from the existing VEST account to a CollegeAmerica account would be excluded from federal adjusted gross income. Therefore, no additional Virginia deduction would be permitted.
If Taxpayer rolled over the entire $4,000 VEST account balance into a CollegeAmerica account, the entire $4,000 would be exempt from federal taxation, assuming that Taxpayer met the requirements of IRC § 529. Again, no additional Virginia deduction would be permitted.
Transaction #6
Taxpayer invested $2,000 in a CollegeAmerica fund in 2002. No other contributions to a college savings account were made by Parent in 2002. Due to an error by Taxpayer's accountant, Taxpayer did not claim a deduction in 2002. The error was realized in 2009, but the statute of limitations for claiming a refund had already expired, thereby preventing Taxpayer from amending his 2002 income tax return. Taxpayer seeks a determination as to whether he is permitted to claim a $2,000 deduction on his 2009 tax return for the deduction he was eligible for in 2002.
Virginia Code § 58.1-322(D)(7)(a) states that:
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- A deduction shall be allowed to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan, pursuant to Chapter 4.8 (§ 23-38.75 et seq.) of Title 23. (Emphasis added).
Parsing the statutory language of Va. Code § 58.1-322(D)(7)(a) indicates that the deduction shall be allowed for contributions made during that specific taxable year.
Virginia Code § 58.1-322(D)(7)(a) provides that, where a deduction exceeds $4,000, "the remainder may be carried forward and subtracted in future taxable years until the purchase price or savings trust contribution has been fully deducted." Prior to the 2007 taxable year, the deduction was limited to $2,000 and, accordingly, any contributions in excess of $2,000 could be carried forward.
Here, the Taxpayer has indicated that the only contribution made in 2000 was a $2,000 contribution to a CollegeAmerica fund. This amount was within the statutory limitations of Va. Code § 58.1-322(D)(7)(a). Because this amount did not exceed the statutory limitation, no portion of the deduction could be carried forward. Accordingly, the deduction cannot be carried forward to future taxable years.
Taxpayer's only course of action for claiming the deduction for the 2002 contribution was to file an amended return for taxable year 2002. However, based on the facts provided by the Taxpayer, the statute of limitations for filing an amended return has expired. Therefore, the deduction cannot be claimed for the 2002 taxable year.
CONCLUSION
Taxpayer is permitted to take a deduction for contributions to VCSP savings trust accounts of up to $4,000 per account each year. For the purposes of determining what constitutes an "account," the Taxpayer must rely on the definition of "account" provided by the VCSP in the VEST and CollegeAmerica program descriptions.
Taxpayer is not permitted to take a deduction for rollovers between VEST and CollegeAmerica accounts because the rollover of earnings is already excluded from federal adjusted income and, subsequently, from Virginia taxable income.
Finally, Taxpayer is not permitted to claim a deduction on his 2009 tax return for a contribution to a CollegeAmerica account that was made in 2002.
The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have additional questions, please contact ***** in the Office of Tax Policy and Administration, Policy Development Division, at *****,
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- Sincerely,
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Craig M. Burns
Acting Tax Commissioner
PD/1-4371475201
Rulings of the Tax Commissioner