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Frequently Asked Questions - Tax Considerations

		What are the federal and state tax advantages? Is there a Michigan income tax deduction? What are the federal estate planning and gift tax benefits? Are contributions to MESP federal tax deductible? How are withdrawals for qualified higher education expenses taxed? How are withdrawals for non-qualified expenses taxed? What is the Generation Skipping Tax? What is the "sunset provision" and how does it affect the federal income tax treatment of 529 Plans?

Is there a Michigan income tax deduction?
Yes, you may also be eligible for a Michigan income tax deduction. A taxpayer is permitted a net contribution deduction from Michigan adjusted gross income for a contribution to an Account less any Qualified Withdrawals from such Account during the tax year.  A taxpayer is permitted to aggregate the net contribution amount to each Account for a total contribution deduction for the tax year.  Such aggregated contribution deduction cannot exceed a total of $5,000 for a single return or $10,000 for a joint return for that tax year. Amounts transferred from another 529 college savings plan are not eligible for the Michigan income tax deduction.

What are the federal estate and gift tax benefits?
Contributions to MESP may help you reduce the taxable value of your estate. Contributions to MESP, together with all other gifts from the account owner to the beneficiary, may qualify for an annual federal gift tax exclusion of $12,000 per donor, per beneficiary for 2008. If an account owner's contribution to a MESP account for a beneficiary in a single year exceeds $12,000, the account owner may elect to treat up to $60,000 of the contributions, or $120,000 for joint filers, as having been made over a period of up to five years for federal gift tax exclusion.

Are contributions to MESP federal tax deductible?
No, contributions are not deductible for federal income tax purposes.

How are withdrawals for qualified higher education expenses taxed?
If you are taking a withdrawal to pay for qualified higher education expenses of the beneficiary, there will be no federal or Michigan income tax. This federal income tax-free treatment of qualified withdrawals and other federal tax benefits are now permanently in place for 529 plans through the passage of the Pension Protection Act of 2006. Use the Withdrawal Request form (PDF, 96KB).

How are withdrawals for non-qualified expenses taxed?
If funds are withdrawn for a purpose other than to pay for qualified higher education expenses (except in the event of a beneficiary's death, disability, scholarship or attendance at a military academy), or they are treated as withdrawn (for example, if an ineligible beneficiary is named), there will be a 10% additional federal tax on the earnings portion of the distribution, as well as federal income tax on the earnings at the account owner's tax rate.

For Michigan tax purposes, a non-qualified withdrawal will result in income taxation on the earnings portion of the distribution and, to the extent that the account owner has previously taken a Michigan income tax deduction for contributions to the account, the contributions portion of the distribution. However, if an account owner has also made contributions to the account that were not deducted, the contributions portion of a non-qualified withdrawal does not have to be included in taxable income until the account owner has withdrawn all of the contributions that were not deducted. Use the Withdrawal Request form (PDF, 96KB).

What is the Generation Skipping Tax?
Transfer of funds or a change in beneficiary is subject to the Generation Skipping Tax (GST) if the new beneficiary is two or more generations below the prior beneficiary. If transfer is subject to GST, tax is imposed on the prior beneficiary. Account owners should consult their own tax advisors for guidance when considering a change of beneficiary or a transfer to another account.

What is the "sunset provision" and how does it affect the federal income tax treatment of 529 Plans?
Federal income tax-free treatment of qualified withdrawals and other federal tax benefits are now permanently in place for 529 plans through the passage of the Pension Protection Act of 2006. The Sunset Provision is the provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that stated that the law allowing federal income tax-free qualified withdrawals was set to expire December 31, 2010.  For more information, see the MESP Disclosure Booklet and Participation Agreements (PDF, 476KB).