My client took a Bright Start 529 distribution to pay for his other daughter's private secondary school tuition -- does he have to add that back as income on his Illinois return?

Plain-English summary

A tax practitioner wrote in about a client who had contributed to a Bright Start 529 college savings plan and deducted those contributions from Illinois taxable income in prior years under the Illinois subtraction modification for college savings pool contributions. Most of the account had been used for the designated beneficiary's (the older daughter's) college education. In 2023, the account owner took a distribution -- with himself, not the designated beneficiary, listed as recipient on the 1099-Q -- and used it to pay for his other daughter's (the beneficiary's sister's) private secondary school tuition. The practitioner asked whether that use counted as a "qualified education expense," whether the amount would need to be recaptured as a Schedule M addition, and whether it mattered that the recipient was the sibling of the primary beneficiary.

The Department's answer: secondary school tuition is not a qualified expense, so the addback applies. The IITA allows a subtraction modification (35 ILCS 5/203(a)(2)(Y)) for up to $10,000 per year contributed to a College Savings Pool account (like Bright Start) or the Illinois Prepaid Tuition Trust Fund. But if amounts deducted that way are later withdrawn for something that isn't a "qualified expense," IITA Section 203(a)(2)(D-22) requires the previously-deducted contribution amount to be added back to Illinois taxable income.

What counts as a "qualified expense." Section 16.5 of the State Treasurer Act defines qualified expenses to include tuition, fees, books, supplies, and equipment for enrollment at an "eligible educational institution"; special-needs services; certain computer/technology expenses; room and board while attending at least half-time; certain apprenticeship program costs; and principal or interest on qualified education loans of the beneficiary or a sibling. An "eligible educational institution" is defined by reference to federal law (20 U.S.C. 1001) as public and private colleges, junior colleges, graduate schools, and certain vocational institutions eligible for federal student aid -- a definition that does not reach K-12 secondary schools.

Applying that here. Because private secondary school is not an "eligible educational institution" under Section 16.5, tuition paid to it is not a qualified expense, regardless of the fact that the money went toward a sibling of the designated beneficiary rather than a stranger. The Department's ruling flatly states: "Expenses for secondary education would not be considered qualified and must be added back on Schedule M to the extent they were previously deducted from Illinois taxable income."

What the Department didn't resolve. The letter doesn't specify the exact dollar addback mechanics beyond pointing to "the extent" previously deducted -- it doesn't walk through whether the addback is limited to the "Basis" figure on the 1099-Q as the practitioner suggested, or otherwise quantify the recapture amount for these particular facts. As a GIL, it also isn't binding and doesn't function as a determination on this taxpayer's specific numbers; a binding Private Letter Ruling would require a separate submission under 86 Ill. Adm. Code 1200.110(b).

What this means for you

529 account owners taking distributions for something other than the designated beneficiary's college costs

If Bright Start (or another Illinois college savings pool) funds are used for anything other than qualified expenses at an eligible educational institution -- including K-12 private school tuition -- the amount previously deducted from Illinois taxable income must be added back on Schedule M in the year of the nonqualified withdrawal. It does not matter whether the actual recipient of the funds is the designated beneficiary, the account owner, or a sibling of the beneficiary; what matters is whether the expense itself is qualified.

Parents splitting 529 savings among multiple children

Bright Start funds contributed and deducted for one beneficiary cannot be shifted tax-free to pay for another family member's secondary school costs. The regulations do allow using funds for a sibling's qualified higher-education costs and even loan repayment for a sibling, but private secondary school tuition falls outside the definition of qualified expenses regardless of whose sibling receives it.

Tax professionals preparing Schedule M for clients with 529 distributions

Compare the 1099-Q distribution's actual use against the Section 16.5 definition of qualified expenses (tuition/fees at an eligible postsecondary institution, certain technology costs, room and board while at least half-time, apprenticeship costs, or qualified education loan payments) before assuming a distribution is tax-free. If the use doesn't fit, the previously-deducted contribution amount is added back on Schedule M, and this letter doesn't specify how to compute the exact addback figure when only part of a distribution is nonqualified, so professional judgment applying the statute to the client's own numbers will still be needed.

Common questions

Q: Does it matter that the money was used for the designated beneficiary's sister rather than for the beneficiary himself?
A: No. The Department's ruling turns entirely on whether the expense itself is "qualified" under Section 16.5 of the State Treasurer Act, not on the family relationship between the beneficiary and whoever actually benefits from the funds.

Q: Is private secondary (K-12) school tuition ever a qualified 529 expense in Illinois?
A: Based on this ruling, no -- the definition of "eligible educational institution" incorporated into Illinois's qualified-expense definition covers colleges, junior colleges, graduate schools, and certain vocational institutions eligible for federal student aid, not K-12 secondary schools.

Q: Does Illinois defer to IRS Publication 970 for what counts as a qualified expense?
A: The ruling doesn't address Publication 970 at all -- it answers strictly by reference to Illinois's own statutory definitions in the State Treasurer Act (30 ILCS 235/16.5), so this letter doesn't confirm or deny whether Illinois's definition otherwise tracks federal guidance.

Q: How much has to be added back on Schedule M?
A: The ruling states that the amount "previously deducted from Illinois taxable income" for the nonqualified use must be added back, but it doesn't work through the exact computation (e.g., whether it's limited to the contribution/basis portion of the distribution) for these particular facts.

Citations and references

Statutes, regulations, and cases:

• 35 ILCS 5/203(a)(2)(Y) (subtraction modification for college savings pool/Prepaid Tuition Trust Fund contributions)
• 35 ILCS 5/203(a)(2)(D-22) (addition modification for nonqualified withdrawals of previously-deducted contributions)
• 30 ILCS 235/16.5 (State Treasurer Act: definitions of "qualified expenses" and "eligible educational institution")
• 86 Ill. Adm. Code 1200.120(b), (c) (GIL is general information, not binding Department policy)
• 86 Ill. Adm. Code 1200.110(b) (procedure for requesting a binding Private Letter Ruling)
• 26 U.S.C. 529(c)(3)(C)(i) (Internal Revenue Code exclusion referenced in the subtraction modification)
• 20 U.S.C. 1001 (federal definition of eligible educational institution, incorporated by reference)
• 29 U.S.C. 50 (National Apprenticeship Act, incorporated by reference for apprenticeship program expenses)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2024/IT24-0003-GIL.pdf

Original ruling text

IT 24-0003-GIL 03/25/2024 ADDITION MODIFICATIONS
Whether certain expenses from Bright Start college savings program are
required to be added back on Schedule M. (This is a GIL.)
March 25, 2024
NAME
Via email to EMAIL
Re:

Whether certain expenses from Bright Start college savings program are
required to be added back on Schedule M

Dear NAME:
This letter is in response to your email dated March 21, 2024, in which you
requested information regarding Illinois income tax. The nature of your request and
the information you have provided require that we respond with a General
Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill.
Adm. Code 1200.120(b) and (c), which may be found on the Department's web site
at www.tax.illinois.gov.
Your letter states as follows:
I am a Tax Pro with COMPANY trying to clarify Illinois tax law around this situation:
My client contributed to a Bright Start 529 Plan and deducted contributions from
Illinois taxable income in prior years. He has been using most of the funds toward
his oldest daughter's college education. In 2023, he took a distribution for his other
daughter (not the designated beneficiary) to pay for private secondary school.
The 1099-Q has these amounts:

1. Gross Distribution $XXXX
2. Earnings $XXXX
3. Basis $XXXX
4. Distribution is from Qualified Tuition program....X State
5. Box checked for the recipient is not the designated beneficiary.
   Recipient is the father who invested in the 529 Plan for his oldest daughter.

MY TAX QUESTION IS:

1. Does Illinois consider use of this Bright Start 529 for the younger daughter's
   secondary education considered "Qualified Education Expense"? Does
   Illinois defer to the rules in Pub 970 pg 51?
2. If not, then I have to enter a recapture amount on Schedule M line 9. Would
   that amount just be the Basis since that is the "amount contributed" and
   claimed on prior year Illinois tax returns as a deduction?
3. Does it matter that she is the sister of the primary beneficiary?
   RULING
   Section 203(a)(2)(Y) of the Illinois Income Tax Act (IITA) allows a subtraction
   modification for amounts contributed to a college savings pool and not deducted
   from adjusted gross income:
   For taxable years beginning on or after January 1, 2005, a maximum of
   $10,000 contributed in the taxable year to (i) a College Savings Pool
   account under Section 16.5 of the State Treasurer Act or (ii) the Illinois
   Prepaid Tuition Trust Fund, except that amounts excluded from gross
   income under Section 529(c)(3)(C)(i) of the Internal Revenue Code
   shall not be considered moneys contributed under this subparagraph
   (Y). For purposes of this subparagraph, contributions made by an
   employer on behalf of an employee, or matching contributions made
   by an employee, shall be treated as made by the employee.
   IITA section 203(a)(2)(D-22) requires that amounts deducted under section
   203(a)(2)(Y) that were not used for qualified expenses be added back in the
   computation of Illinois taxable income:
   For taxable years beginning on or after January 1, 2018: (1) in the case
   of a nonqualified withdrawal or refund, as defined under Section 16.5
   of the State Treasurer Act, of moneys from a qualified tuition program
   under Section 529 of the Internal Revenue Code administered by the
   State, an amount equal to the contribution component of the
   nonqualified withdrawal or refund that was previously deducted from
   base income under subsection (a)(2)(Y) of this Section, . . . .
   Section 16.5 of the State Treasurer Act defines qualified expenses:
   "Qualified expenses" means: (i) tuition, fees, and the costs of books,
   supplies, and equipment required for enrollment or attendance at an
   eligible educational institution; (ii) expenses for special needs
   services, in the case of a special needs beneficiary, which are
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incurred in connection with such enrollment or attendance; (iii)
certain expenses, to the extent they qualify as qualified higher
education expenses under Section 529 of the Internal Revenue Code,
for the purchase of computer or peripheral equipment or Internet
access and related services, if such equipment, software, or services
are to be used primarily by the beneficiary during any of the years the
beneficiary is enrolled at an eligible educational institution, except
that, such expenses shall not include expenses for computer
software designed for sports, games, or hobbies, unless the software
is predominantly educational in nature; (iv) room and board expenses
incurred while attending an eligible educational institution at least
half-time; (v) 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 the National Apprenticeship Act (29 U.S.C. 50); and (vi)
amounts paid as principal or interest on any qualified education loan
of the designated beneficiary or a sibling of the designated
beneficiary, as allowed under Section 529 of the Internal Revenue
Code. A student shall be considered to be enrolled at least half-time if
the student is enrolled for at least half the full-time academic
workload for the course of study the student is pursuing as
determined under the standards of the institution at which the
student is enrolled.
Section 16.5 further defines eligible educational institution:
"Eligible educational institution" means public and private colleges,
junior colleges, graduate schools, and certain vocational institutions
that are described in Section 1001 of the Higher Education Resource
and Student Assistance Chapter of Title 20 of the United States Code
(20 U.S.C. 1001) and that are eligible to participate in Department of
Education student aid programs.
As stated above, this is a general information letter which does not constitute a
statement of policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department. If you are not under audit and you wish to obtain a
binding Private Letter Ruling regarding your factual situation, please submit all of
the information set out in items 1 through 8 of Section 1200.110(b).
Expenses for secondary education would not be considered qualified and must be
added back on Schedule M to the extent they were previously deducted from Illinois
taxable income.
Sincerely,
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Brian Fliflet
Deputy General Counsel, Income Tax Policy
cc:

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