Tax treatment of designated beneficiaries and contributors

Except as otherwise provided in this subsection, no amount shall be includible in gross income of—

(A) a designated beneficiary under a qualified tuition program, or

(B) a contributor to such program on behalf of a designated beneficiary,

with respect to any distribution or earnings under such program.

For purposes of chapters 12 and 13—

(A) In general Any contribution to a qualified tuition program on behalf of any designated beneficiary— (i) shall be treated as a completed gift to such beneficiary which is not a future interest in property, and (ii) shall not be treated as a qualified transfer under section 2503(e).

(B) Treatment of excess contributions If the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for such year under section 2503(b), such aggregate amount shall, at the election of the donor, be taken into account for purposes of such section ratably over the 5-year period beginning with such calendar year.

(A) In general Any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter.

(B) Distributions for qualified higher education expenses For purposes of this paragraph— (i) In-kind distributions No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. (ii) Cash distributions In the case of distributions not described in clause (i), if— (I) such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i)), no amount shall be includible in gross income, and (II) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions. (iii) Exception for institutional programs In the case of any taxable year beginning before January 1, 2004 , clauses (i) and (ii) shall not apply with respect to any distribution during such taxable year under a qualified tuition program established and maintained by 1 or more eligible educational institutions. (iv) Treatment as distributions Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for purposes of this paragraph. (v) Coordination with American Opportunity and Lifetime Learning credits The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced— (I) as provided in section 25A(g)(2), and (II) by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A. (vi) Coordination with Coverdell education savings accounts If, with respect to an individual for any taxable year— (I) the aggregate distributions to which clauses (i) and (ii) and section 530(d)(2)(A) apply, exceed (II) the total amount of qualified higher education expenses otherwise taken into account under clauses (i) and (ii) (after the application of clause (v)) for such year, the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under clauses (i) and (ii) and section 530(d)(2)(A).

(C) Change in beneficiaries or programs (i) Rollovers Subparagraph (A) shall not apply to that portion of any distribution which, within 60 days of such distribution, is transferred— (I) to another qualified tuition program for the benefit of the designated beneficiary, (II) to the credit of another designated beneficiary under a qualified tuition program who is a member of the family of the designated beneficiary with respect to which the distribution was made, or (III) to an ABLE account (as defined in section 529A(e)(6)) of the designated beneficiary or a member of the family of the designated beneficiary. Subclause (III) shall not apply to so much of a distribution which, when added to all other contributions made to the ABLE account for the taxable year, exceeds the limitation under section 529A(b)(2)(B)(i). (ii) Change in designated beneficiaries Any change in the designated beneficiary of an interest in a qualified tuition program shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is a member of the family of the old beneficiary. (iii) Limitation on certain rollovers Clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary.

(D) Special rule for contributions of refunded amounts In the case of a beneficiary who receives a refund of any qualified higher education expenses from an eligible educational institution, subparagraph (A) shall not apply to that portion of any distribution for the taxable year which is recontributed to a qualified tuition program of which such individual is a beneficiary, but only to the extent such recontribution is made not later than 60 days after the date of such refund and does not exceed the refunded amount.

(E) Special rollover to roth iras from long-term qualified tuition programs (i) In general In the case of a distribution from a qualified tuition program of a designated beneficiary which has been maintained for the 15-year period ending on the date of such distribution, subparagraph (A) shall not apply to so much the portion of such distribution which— (I) does not exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the 5-year period ending on the date of the distribution, and (II) is paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary. (ii) Limitations (I) Annual limitation Clause (i) shall only apply to so much of any distribution as does not exceed the amount applicable to the designated beneficiary under section 408A(c)(2) for the taxable year (reduced by the amount of aggregate contributions made during the taxable year to all individual retirement plans maintained for the benefit of the designated beneficiary). (II) Aggregate limitation This subparagraph shall not apply to any distribution described in clause (i) to the extent that the aggregate amount of such distributions with respect to the designated beneficiary for such taxable year and all prior taxable years exceeds $35,000.

(A) In general No amount shall be includible in the gross estate of any individual for purposes of chapter 11 by reason of an interest in a qualified tuition program.

(B) Amounts includible in estate of designated beneficiary in certain cases Subparagraph (A) shall not apply to amounts distributed on account of the death of a beneficiary.

(C) Amounts includible in estate of donor making excess contributions In the case of a donor who makes the election described in paragraph (2)(B) and who dies before the close of the 5-year period referred to in such paragraph, notwithstanding subparagraph (A), the gross estate of the donor shall include the portion of such contributions properly allocable to periods after the date of death of the donor.

For purposes of chapters 12 and 13—

(A) Treatment of distributions Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift.

(B) Treatment of designation of new beneficiary The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is— (i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and (ii) a member of the family of the old beneficiary.

Any reference in this section to the term “qualified higher education expense” shall include a reference to the following expenses in connection with enrollment or attendance at, or for students enrolled at or attending, an elementary or secondary public, private, or religious school:

(A) Tuition.

(B) Curriculum and curricular materials.

(C) Books or other instructional materials.

(D) Online educational materials.

(E) Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and— (i) is licensed as a teacher in any State, (ii) has taught at an eligible educational institution, or (iii) is a subject matter expert in the relevant subject.

(F) Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission.

(G) Fees for dual enrollment in an institution of higher education.

(H) Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies.

Any reference in this subsection to the term “qualified higher education expense” shall include a reference to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act ( 29 U.S.C. 50 ).

(A) In general Any reference in this subsection to the term “qualified higher education expense” shall include a reference to amounts paid as principal or interest on any qualified education loan (as defined in section 221(d)) of the designated beneficiary or a sibling of the designated beneficiary.

(B) Limitation The amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000 (reduced by the amount of distributions so treated for all prior taxable years).

(C) Special rules for siblings of the designated beneficiary (i) Separate accounting For purposes of subparagraph (B) and subsection (d), amounts treated as a qualified higher education expense with respect to the loans of a sibling of the designated beneficiary shall be taken into account with respect to such sibling and not with respect to such designated beneficiary. (ii) Sibling defined For purposes of this paragraph, the term “sibling” means an individual who bears a relationship to the designated beneficiary which is described in section 152(d)(2)(B).