A Qualified Tuition Program, also known as a QTP, is a way for one person to contribute tax-free money to a beneficiary’s higher education. People use QTPs either to prepay for college or to pay for a student currently enrolled in college. Understand the education costs a QTP is eligible to cover before setting one up.
The Basics of a QTP Plan
A QTP plan is also known as a 529 plan by the IRS. QTPs are set up by state government and education institutions, and they allow you to either partially or wholly pay for a beneficiary’s education. For the most part, the beneficiary doesn’t have to pay taxes on the money in a QTP, which makes these accounts a popular way to give a child or relative money for school.
What Can I Use a QTP to Pay For?
You can set up a QTP to cover tuition, school fees, books, supplies, and other equipment your beneficiary might need for education.
If the QTP is to cover room and board, you need to follow a few guidelines. The student has to be enrolled at least half-time for room and board expenses to count. The room and board cost have to be one of two things. The first is the room and board allowance an educational institution would set up as part of the cost of attending the university. The second is the cost of actually living on campus during an academic period. The QTP will cover whichever is greater, but it can’t exceed that amount. The best way to ensure you’ve got the right numbers is to contact the institution directly to get the room and board costs.
You can also use the QTP funds to pay for computers and software but only if the QTP beneficiary will be using those products primarily for school. Games and recreational technology don’t qualify.
How Does a QTP Impact My Taxes?
You can’t put more money into a QTP than the education will actually cost. You also can’t deduct the amount you put into the account from your taxes on your Federal Tax Return. However, the money you put into the QTP is tax-free when you put it in. If you use the money to then pay for the qualified education expenses, you don’t pay taxes when you pull it out, either.
If you’re the beneficiary of the QTP, you do not have to report the money you receive as income on your tax return, as long as you use it to pay for your higher education. If you end up having money in the QTP left over after paying for your education, that amount is taxable, so carefully calculating how much goes into this account is a good idea.
Remember to adjust your QTP contributions for other tax-free educational assistance, like scholarships. Parts of Pell Grants are also tax-free, as is the assistance a beneficiary might receive from an employer or due to veteran status. Creating a QTP requires financial planning and an understanding of how much college costs, but it is a smart way to contribute to someone’s education.