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Tax
aspects of refinancing a home mortgage
You
are planning to refinance the mortgage on your
home and have asked me about the tax rules regarding
the refinancing. This letter will discuss whether
you can deduct the interest you will pay on your
new mortgage, the points that you pay, and other
fees that you may pay in connection with the refinancing.
Interest
deduction. Interest that you pay on a home mortgage
is deductible within limits, depending on whether
it is home acquisition debt, home equity debt,
or grandfathered debt. Interest on the refinanced
mortgage will be deductible if it falls into one
of these categories, as explained below.
Home
acquisition debt is a mortgage you took out after
Oct. 13, 1987, to buy, build, or substantially
improve your main or second home, and that is
secured by that home. Interest on home acquisition
debt is deductible, but your total home acquisition
debt can't exceed $1 million ($500,000 if married
filing separately).
Home
equity debt is any debt secured by your first
or second home, other than home acquisition debt,
or grandfathered debt. Thus, it includes mortgage
loans taken out for reasons other than to buy,
build, or substantially improve your home, and
mortgage debt in excess of the home acquisition
debt limit. Interest is deductible on up to $100,000
of home equity debt ($50,000 if married filing
separately).
Grandfathered
debt is mortgage debt secured by your first or
second home that was taken out before Oct. 14,
1987, no matter how you used the proceeds. All
of the interest you pay on grandfathered debt
is fully deductible.
Refinancing.
If the old mortgage that you are refinancing is
home acquisition debt, your new mortgage will
also be home acquisition debt, up to the principal
balance of the old mortgage just before it was
refinanced. The interest on this portion of the
new mortgage will be deductible. Any debt in excess
of this limit won't be home acquisition debt,
but it may qualify as home equity debt, subject
to the $100,000/$50,000 limit.
If
you are refinancing grandfathered (pre-Oct. 14,
1987) debt for an amount that isn't more than
the remaining debt principal, the refinanced debt
will still be grandfathered debt. If the new debt
exceeds the mortgage principal on the old debt,
the excess will be treated as home acquisition
or home equity debt.
Grandfathered
debt that was refinanced is treated as grandfathered
debt only for the period that remained on the
old debt that was refinanced. Once that period
ends, you must treat the debt as home acquisition
debt or home equity debt, based on how the debt
proceeds are used. There's an exception that allows
a longer period of deduction for balloon notes
that are refinanced after Oct. 13, 1987.
Points.
In general, points that you pay to refinance your
home aren't fully deductible in the year that
you paid them. Instead, you can deduct a portion
of the points each year over the life of the loan.
To
figure your deduction for points, divide the total
points by the number of payments to be made over
the life of the loan. Then, multiply this result
by the number of payments you made in the tax
year.
For
example, if you paid $3,000 in points and you
will make 360 payments on a 30-year mortgage,
you can deduct $8.33 per monthly payment. For
a year in which you make 12 payments, you can
deduct a total of $99.96 ($8.33 × 12).
However,
you may be entitled to a larger first-year deduction
for points if you used part of the proceeds of
the refinancing to improve your home and you meet
certain other requirements. In that case, the
points associated with the home improvements may
be fully deductible in the year they were paid.
For
example, say that you refinance a high-rate mortgage
that has an outstanding balance of $80,000 with
a new lower-rate loan for $100,000. You use the
proceeds of the new mortgage loan to pay off the
old loan and to pay for $20,000 of improvements
to your home. Since 20% of the new loan was incurred
to pay for improvements, 20% of the points you
paid can be deducted in the year of the refinancing.
If
you are refinancing your mortgage for the second
time, the portion of the points on the first refinanced
mortgage that you haven't yet deducted may be
deductible at the time of the second refinancing.
Penalties
and fees. A prepayment penalty that you pay to
terminate your old mortgage is deductible as interest
in the year of payment.
However,
fees paid to obtain the new mortgage aren't deductible,
nor can you add them to your basis in your home
to reduce the gain when you sell it. Examples
of such nondeductible fees are credit report fees,
loan origination fees, and appraisal fees.
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Tax
breaks for individuals in the Economic Growth
and Tax Relief Reconciliation Act of 2001
Congress
recently passed a major tax bill. Although many
of its provisions won't go into effect for several
years, most individuals will see at least some
income tax benefits this year. These include a
new 10% bracket, an across-the-board one-point
cut on July 1 in each of the current tax brackets
above the 15% bracket, modest relief from the
alternative minimum tax (AMT), and a higher child
credit. Here is a brief overview of these tax
changes.
New
10% bracket. The Act carves a new 10% bracket
out of part of the current 15% bracket. Specifically,
the first $6,000 of taxable income for singles
and married taxpayers filing separately, $10,000
for heads of household, and $12,000 for married
persons filing joint returns, will be taxed at
10%. Individuals will get the benefit from the
new bracket for 2001 in the form of checks from
the federal government of up to $300 for a single
person or married individual filing separately,
up to $500 for a head of household such as a single
parent, and up to $600 for a married couple. Individuals
who are eligible to be claimed as dependents on
another taxpayer's return (such as a dependent
child) and nonresident aliens won't get a check..
IRS officials expect to start cutting checks (called
"advance refund checks") in August at
a rate of about nine million a week, based on
2000 income tax returns. The Act instructs the
Treasury to send the advance refund checks by
Oct. 1, but people who filed late or got filing
extensions may get their checks later. The payments
will be made in numerical order based on the last
two digits of the lead Social Security number
on the tax return. Those eligible individuals
who filed no tax return for 2000 or owed no tax
will benefit from the 10% bracket when they file
their 2001 tax return -- they'll get a credit
of up to $300, $500, or $600, depending on filing
status.
One-point
across-the-board tax-rate cut. As the first installment
of the individual income tax rate cuts that will
unfold over the next five years, the "old"
income tax rates of 28%, 31%, 36% and 39.6% will
each be reduced by one percentage point, effective
July 1 of this year, resulting in blended tax
rates for all of 2001 of 27.5%, 30.5%, 35.5% and
39.1%, respectively. The 15% rate, however, will
remain unchanged. In the near future, the Treasury
Department will notify employers of new withholding
schedules, which will be adjusted to reflect the
initial one-percentage-point reduction in tax
rates. The lower marginal rates should result
in slightly bigger paychecks as the amount withheld
for taxes is reduced.
Modest
AMT relief. The Act provides only limited, temporary
alternative minimum tax (AMT) relief for individuals.
To find out if you owe AMT, you start with regular
taxable income, modify it with various adjustments
and preferences (such as addbacks for property
and income taxes and dependency exemptions), and
then subtract an exemption amount. The result
is subject to an AMT tax rate of 26% or 28%. You
pay the AMT only if it exceeds your regular tax
bill. For 2001, the Act increases the AMT exemption
amount by $4,000 for married taxpayers filing
joint returns, and by $2,000 for other individuals.
However, the AMT exemption amount phases out at
higher levels of income, and the boosted exemption
will only remain in place through 2004. Many taxpayers,
particularly those residing in states with high
income and/or property taxes, will not receive
the full benefit of the new tax cuts and instead
will have to pay the AMT unless Congress enacts
additional AMT relief. Thus, it is still necessary
to plan how to avoid or at least reduce the AMT.
Higher
child credit. Parents of dependent children younger
than 17 may claim a tax credit per child, if parental
income doesn't exceed certain dollar limits. (A
tax credit reduces your tax bill dollar for dollar,
as opposed to a deduction, which reduces the amount
of your income subject to taxation.) Under the
2001 Act, the maximum credit per child increases
from $500 to $600 for 2001, meaning that eligible
taxpayers will be able to claim the additional
$100 credit on their 2001 returns filed next year.
In later years the credit gradually climbs until
it reaches $1,000 in 2010.
Looking
down the road. Much of the $1.35 trillion tax
cut in the 2001 Act will take longer to materialize.
Many of the larger tax cuts in the Act don't kick
in until 2002 or later. Some new tax breaks phase
in over the next decade, while some current rules
phase out over that period, creating tax-planning
challenges for everyone. If you would like to
discuss how the Act may affect your individual
tax and financial planning situation, please do
not hesitate to call.
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Avoiding
Inadvertent Termination of S Corporation Status
Now
that you have chosen the S corporation form for
your business, you should be aware of certain
steps that you should take to avoid an inadvertent
termination of S corporation status.
o
Avoid transfers to ineligible shareholders. In
general, the only types of shareholders which
an S corporation may have are individuals who
are U.S. citizens or residents, a decedent's estate,
certain types of trusts, and certain exempt organizations.
Therefore, it is important that you confirm that
all the shareholders are eligible to be S corporation
shareholders -- i.e., that no shareholder is a
nonresident alien, a partnership, or a corporation;
that all trusts are properly structured to be
eligible shareholders; and that any elections
required for a trust have been made. Even if a
corporation's initial shareholders are all eligible
shareholders, S corporation status will be terminated
if any shares are transferred to a nonresident
alien individual, a corporation, a partnership,
or a trust (other than the specific types of trusts
which are permitted to be S corporation shareholders).
In
order to prevent a shareholder from causing a
termination of S corporation status by transferring
his shares to an ineligible shareholder, a shareholders'
agreement should prohibit transfer of any shares
to a person other than a permitted S corporation
shareholder, and require a similar undertaking
on the part of any transferee, as a condition
to any transfer. In addition, if permitted by
local law, an appropriate restriction should be
imposed in the corporation's charter or by-laws
so that a purported transfer to an ineligible
shareholder would be void.
o
Avoid violating the shareholder limitation. An
S corporation cannot have more than 75 shareholders.
Even if this limit is not exceeded initially,
S status will terminate if, as a result of new
issuances or transfers of shares, the limit is
exceeded at any time in the future. New issuances
of stock require corporate action, and you should
keep this rule in mind when considering future
issuances of stock so that the 75 shareholder
limitation will not be exceeded.
Transfers
by shareholders can be somewhat more problematic,
since they can occur without any action on the
part of the corporation. Therefore, if the transfer
would cause the 75-shareholder limit to be exceeded,
a shareholders' agreement should prohibit the
transfer of any shares to a person who is not
already a shareholder. A similar restriction should
be imposed on the transferee. In addition, if
permitted by local law, an appropriate restriction
should be imposed in the corporation's charter
or by-laws so that a purported transfer that caused
the limit to be exceeded would be void.
o
Don't issue more than one class of stock. An S
corporation can only have one class of stock.
Be sure to keep this requirement in mind when
considering future changes to the capital structure
of the corporation. The IRS allows S corporations
to use various equity incentive compensation arrangements
without violating the one class of stock restriction.
If you want to create an equity incentive compensation
plan, I would be happy to discuss with you how
to structure the plan.
o Avoid excess passive investment income. If an
S corporation has accumulated earnings and profits
(because it was once a C corporation or is a transferee
of a C corporation), its S election will terminate
if, for a period of three consecutive tax years,
its "passive investment income" exceeds
25% of its gross receipts. The first step in avoiding
an inadvertent termination under this rule is
to keep track of the corporation's passive investment
income to determine whether the 25% limitation
may be exceeded. Although excess passive income
is subject to a special tax, S corporation status
will terminate only if the limit is exceeded for
three consecutive years. Thus, if you are willing
to pay the tax, you can monitor the results of
two years' operations while you plan to avoid
a termination.
If
a corporation is in danger of exceeding the 25%
passive income limitation for three years, there
are two basic approaches to avoid termination
of S corporation status. Since termination will
only occur if the corporation has accumulated
earnings and profits from C corporation years,
termination can be avoided by stripping out those
earnings and profits by way of a dividend. Ordinarily,
distributions by an S corporation reduce pre-S
corporation earnings and profits only after the
accumulated income from all S corporation years
has been distributed. However, it is possible
to elect to treat distributions as coming from
pre-S corporation earnings and profits first.
Moreover, if it desired to strip out earnings
and profits without actually depleting the corporation's
cash or other liquid assets, a "deemed"
dividend election can be made. Be aware, however,
that a distribution out of pre-S corporation earnings
and profits (whether actual or under the deemed
dividend election) is generally taxable to shareholders
as a dividend (unlike a distribution from accumulated
S corporation income which is generally a return
of capital).
A
second approach to avoiding termination under
the passive income rules is to tailor the corporation's
operations so that the 25% passive income limit
is not exceeded. Since termination will occur
only after the limit is exceeded for three consecutive
years, if you are willing to incur the tax on
excess passive income, there should be sufficient
time to take action to avoid a termination.
This
can be done by reducing the amount of passive
investment income, or by increasing the amount
of other income. Since the test is applied to
gross receipts, acquiring a business which produces
receipts which are not passive investment income,
even if it does not produce much in the way of
net income, is one possible solution. It may also
be possible to restructure certain operations
so that passive income (e.g., certain rental income)
becomes active income. (Unfortunately, an investment
in municipal bonds producing tax-exempt interest
is not a solution under these rules.)
If
it turns out that, despite appropriate precautions,
S corporation status is nevertheless terminated,
all is not lost. It is possible to apply to IRS
for a "waiver" of an inadvertent termination
of S status. Naturally, the safest course of action
is avoid a termination in the first place.
If
you have any further questions, or if you'd like
me to go into the appropriate provisions to avoid
transfers of stock which would cause a termination,
please telephone us.
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Why
an S Shareholder Reports More Than He Receives
Why
is it, in a given year, you may be taxed on more
S corporation income than was distributed to you
from the S corporation in which you are a shareholder.
The
answers lies in the way S corporations and their
shareholders are taxed. But before explaining
those rules, let us assure you that when you are
taxed on undistributed income, you won't be taxed
again if and when the income ultimately is paid
to you.
Unlike
a regular or C corporation, an S corporation generally
isn't subject to income tax. Rather, each shareholder
is taxed on the corporation's earnings, whether
or not the earnings are distributed. Similarly,
if an S corporation has a loss, the loss is passed
through to the shareholders. Various rules, however,
may prevent a shareholder from currently using
his share of the corporation's loss to offset
other income.
While
an S corporation generally isn't subject to income
tax, it is treated as a separate entity for purposes
of determining its income, gains, losses, deductions
and credits. This makes it possible to pass on
to shareholders their share of these items.
An
S corporation must file an information return
(Form 1120-S). On Schedule K of this form, the
corporation separately identifies many items of
income, deduction, credits, etc. This is so that
each shareholder can properly treat items that
are subject to limits or other rules that could
affect their correct treatment at the shareholder's
level. Examples of such items include capital
gains and losses, charitable contributions, and
interest expense on investment debts. Each shareholder
gets a Schedule K-1 showing his share of these
items.
Basis
and distribution rules ensure that shareholders
aren't taxed twice. A shareholder's initial basis
in his stock (the determination of which varies
depending on how the stock was acquired) is increased
by his share of the S corporation's taxable income.
When that income is paid out to shareholders in
cash, they aren't taxed on the cash if they have
sufficient basis. Rather, shareholders merely
reduce their basis by the amount of the distribution.
If a cash distribution exceeds a shareholder's
basis, then the excess is taxed to the shareholder
as a capital gain.
Example:
Anderson and Baker each contribute $50,000 to
form an S corporation. The corporation has $100,000
of taxable income in Year 1, during which it makes
no cash distributions to Anderson or Baker. Each
of them pick up $50,000 of taxable income from
the corporation as shown on their K-1s. Each has
a starting basis of $50,000, which is increased
by $50,000 to $100,000. In Year 2, the corporation
breaks even has zero taxable income and distributes
$50,000 to Anderson and a like amount to Baker.
Anderson and Baker have no income from the corporation
in Year 2. Plus, the cash distributed to them
is received tax-free. Each of them, however, must
reduce the basis in his stock from $100,000 to
$50,000.
In
reality, the basis and distribution rules are
far more complicated. For example, many other
events require basis adjustments and there are
a host of special rules covering distributions
from an S corporation having accumulated earnings
and profits from a tax year when it was a regular
corporation.
Please
call us if you wish to further discuss any aspect
of how you are taxed as an S shareholder.
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HOPE
Credit and Lifetime Learning Credit for Higher
Education Expenses
The
HOPE credit and the Lifetime Learning credit for
"qualified tuition and related expenses"
(see below) may allow you to turn part of the
higher education expenses you incur for yourself,
your spouse, or your dependents into tax savings.
The
maximum HOPE credit a taxpayer may claim is $1,500
per year per student, for the first two years
of undergraduate education at an eligible educational
institution. The maximum HOPE credit amount will
be adjusted for inflation after 2001. The maximum
Lifetime Learning credit that may be claimed is
$1,000 per year ($2,000 per year after 2002) per
taxpayer, for any post-high school education (including
graduate-level courses and courses to acquire
or improve job skills) at an eligible educational
institution. The maximum Lifetime Learning credit
will not be adjusted for inflation.
Generally,
eligible educational institutions are accredited
schools offering credit toward a bachelor's or
associate's degree or other recognized post-high
school credential, and certain vocational schools.
The
HOPE credit is available only for the qualified
tuition and related expenses of an eligible student,
i.e., a student who's enrolled in a degree or
certificate program at an eligible educational
institution on at least a half-time basis, and
who has never been convicted of a federal or state
felony drug offense. The Lifetime Learning credit
is not subject to the eligible student/felony
drug offense restrictions, and may be available
for a student taking only one course.
The
HOPE credit and the Lifetime Learning credit aren't
allowed for an expense that's otherwise deductible.
But, for qualified tuition and related expenses
paid in 2002-2005 for an individual, an otherwise
eligible taxpayer may choose to claim the appropriate
credit or the deduction allowed for those years
for higher education expenses.
The
HOPE credit and the Lifetime Learning credit may
not be claimed in a year when the student receives
any tax-exempt distribution from an education
individual retirement account (that is, an education
IRA). However, beginning next year (in 2002),
a taxpayer may claim a HOPE credit or a Lifetime
Learning credit for a tax year and exclude from
gross income amounts distributed (both the principal
and the earnings portions) from an education IRA
for the same student, as long as the distribution
is not used for the same educational expenses
for which a credit was claimed. Similarly, a taxpayer
may claim a HOPE credit or Lifetime Learning credit
for a tax year and also exclude from gross income
amounts distributed (both the principal and the
earnings portions) from a qualified tuition program
on behalf of the same student, as long as the
distribution isn't used for the same expenses
for which a credit was claimed.
The
HOPE/Lifetime Learning credits may not be claimed
in the same tax year for the same expenses, but
each may be claimed for different expenses. For
example, in the same tax year, a taxpayer may
claim the HOPE credit for the qualified tuition
and related expenses of one or more qualifying
dependents, and may claim the Lifetime Learning
credit for the qualified tuition and related expenses
incurred for himself.
In
order to be eligible for the HOPE credit or the
Lifetime Learning credit for a tax year, qualified
tuition and related expenses must be paid during
that tax year for education furnished during an
academic period (e.g., semester) that starts within
that tax year or within the first three months
of the following year. Under this rule, taxpayers
have a timing option. For example, for a semester
beginning in Jan. of Year 2, a taxpayer may pay
the expenses in Year 1 or Year 2. The credit will
be available in whichever year the payment is
made.
The
HOPE/Lifetime Learning credits are nonrefundable
-- i.e., they can reduce regular income taxes
to zero but cannot result in the receipt of a
refund. For 2000 and 2001, they can also be used
to reduce the alternative minimum tax to zero.
After 2001, the credits will be allowed only to
the extent that the taxpayer's regular income
tax liability exceeds his or her tentative minimum
tax.
If
the expenses on which the HOPE/Lifetime Learning
credits are based are later refunded, the credits
may have to be recaptured -- i.e., the tax for
the refund year may be increased to account for
a recomputed credit for the earlier year.
As
noted above, the HOPE/Lifetime Learning credits
are based on the payment of qualified tuition
and related expenses. These are the expenses for
tuition, books and academic fees that are required
for enrollment or attendance at an eligible educational
institution. Qualified tuition and related expenses
do not include student activity fees, athletic
fees, insurance expenses, room and board, transportation
costs and other personal living expenses. They
also don't include the cost of any course or education
involving sports, games, or hobbies unless the
course or education is part of the student's degree
program.
The
amount of qualified tuition and related expenses
taken into account in computing the HOPE/Lifetime
Learning credits must be reduced by tax-exempt
scholarships and fellowships, certain military
benefits, and any other tax-exempt payments of
those expenses other than gifts or bequests.
Both
the HOPE credit and the Lifetime Learning credit
are phased out ratably for married taxpayers filing
jointly with adjusted gross income (AGI), with
certain modifications, between $80,000 and $100,000.
That is, the credit is reduced if the modified
AGI is above $80,000 and is unavailable if it's
$100,000 or more. For taxpayers who aren't married
filing jointly, the phase-out range is $40,000
to $50,000. After 2001, the phase-out amounts
will be adjusted for inflation.
Neither
the HOPE credit nor the Lifetime Learning credit
is available for taxpayers who are married filing
separately.
In
addition, neither the HOPE credit nor the Lifetime
Learning credit is allowed to an individual who
is claimed as a dependent on another's return.
In this situation, the HOPE/Lifetime Learning
credits are allowed instead to the taxpayer claiming
that individual as a dependent, and the credits
are based on the total qualified tuition and related
expenses paid both by the taxpayer and the student.
But if no one claims the student as a dependent
on a tax return for the year, the HOPE/Lifetime
Learning credits are allowed to the student on
his or her own return, based on the expenses paid
by the student. In either case, the student's
credit takes into account the expenses that a
third party (e.g., the student's grandparent)
pays to the eligible educational institutional
directly.
Eligibility
for the HOPE and Lifetime Learning credits are
subject to a number of technical requirements
not discussed above. Please give us a call if
you would like to discuss your eligibility for
these credits and how to claim them.
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Taxation
of barter income
As
the owner of a business, you may sometimes find
it to your advantage to barter for goods and services
rather than paying in cash. You should be aware,
however, that the fair market value of goods and
that you receive in bartering is taxable income,
just as if you had received a cash payment.
Exchanges
of services result in taxable income for both
parties. Say, for example, that a computer consultant
agrees to an exchange of services with an advertising
agency. Both parties to the transaction are taxed
on the fair market value of the services received.
This is the amount they would normally charge
for the same services. If the parties agree to
the value of the services in advance, that will
be considered the fair market value unless there
is contrary evidence.
Income
is also realized where services are exchanged
for property. For example, if an architectural
firm does work for a corporation in exchange for
shares of the corporation's stock, it will have
income equal to the fair market value of the stock.
Many
business owners join barter clubs that facilitate
barter exchanges. These clubs generally use a
system of "credit units" that are awarded
to members who provide goods and services and
can be redeemed for goods and services from other
members.
If you participate in a barter club, you'll be
taxed on the value of credit units at the time
they are added to your account, even if you don't
redeem the units for actual goods and services
until a later year. For example, say that in Year
1 you earn 2,000 credit units, and that each unit
is redeemable for one dollar in goods and services.
In Year 1, you'll have $2,000 of income. You won't
pay additional tax if you redeem the units in
Year 2, since you've already been taxed once on
that income.
When
you join a barter club, you'll be asked to give
the club your social security number or employer
identification number and to certify that you
aren't subject to backup withholding. Unless you
make this certification, the club must withhold
tax from your bartering income at a 31% rate.
By
Jan. 31 of each year, the barter club will send
you a Form 1099-B, which shows the value of cash,
property, services, and credits that you received
from exchanges during the previous year. This
information will also be reported to IRS.
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Qualified
tuition programs--"529 plans"
If
you have a child (or if you'd like to help someone
else's child) who is going to attend college in
the future, you may be interested to know that
our state has set up a qualified tuition program
that allows prepayment of higher education costs
on a tax-favored basis. These programs are sometimes
referred to as "529 plans," for the
Code section that provides for them.
Under
the program, funds that you place in the program
are held in a special account to be used to cover
the future higher education costs of the child
you designate as beneficiary. The earnings on
the account aren't taxed while the funds are in
the program. Instead, at the time the funds are
used for the child's higher education, the earnings
(but not the contributions) will be taxed to the
child. And since the child is likely to be in
a low tax bracket when using the funds, the earnings
will be taxed at a favorable rate. Further, there
is no tax on distributions to the extent the funds
are used to pay qualified expenses. Also, private
education institutions will be allowed to establish
programs, but distributions from those programs
won't be tax-free until 2004.
Tuition,
fees, books, supplies, and required equipment
can be prepaid through our state's qualified tuition
program. What's more, reasonable room and board
expenses of a student who is enrolled at least
half-time may also be prepaid.
Accredited
colleges, junior colleges, and area vocational
schools are qualified to participate in the tuition
program. In addition, accredited post-secondary
schools offering credit towards a bachelor's degree,
an associate's degree, a graduate or professional
degree, or another recognized post-secondary credential,
are eligible to participate. Certain proprietary
institutions and post-secondary vocational education
institutions that are eligible to participate
in Department of Education student-aid programs
may also participate in the qualified tuition
program.
The
contributions you make to the qualified tuition
program are not subject to gift tax, except to
the extent the contributions exceed $11,000 annually
(indexed for inflation). And if your contributions
in a year exceed $11,000 (as indexed for inflation),
you can elect to take the contributions into account
ratably over a five-year period starting with
the year of the contributions.
Please
note that if a distribution of earnings isn't
used for qualified higher education expenses of
the beneficiary, a 10% additional tax will be
imposed on the distribution.
A distribution from a qualified program isn't
a gift, but a change in beneficiary or rollover
to the account of a new beneficiary is.
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