If I roll over money from another state's 529 plan into Utah's own SAVINGS PLAN (UESP), can I claim the Utah state income tax deduction on the rolled-over amount — and if I roll money OUT of a Utah SAVINGS PLAN account into another state's 529 plan, do I have to pay back deductions I already claimed?

Plain-English summary

The administrator of Utah's official Section 529 college savings plan (referred to in the ruling as "SAVINGS PLAN," later rebranded UESP and now my529) asked the Utah State Tax Commission for an expedited ruling on several rollover scenarios affecting the Utah state income tax deduction available under Utah Code Ann. § 59-10-114(2)(i). Only contributions to Utah's own plan qualify for the state deduction — contributions to another state's 529 plan don't. The plan wanted clarity on what happens when money moves between plans.

The Commission's August 2006 response worked through each scenario. Rollover from another state's 529 plan into Utah's SAVINGS PLAN: even though a literal reading of § 59-10-114(2)(i) could be read to require the contributed funds to come from that year's taxable income (which rollover funds technically don't), the Commission adopted the more workable reading that a rollover into a Utah account is simply treated as a contribution to that Utah account in the year received — because money is fungible and the Commission can't track and police its ultimate original source. So the taxpayer gets the deduction on the full rolled-over amount (principal plus any earnings), not just the original contribution basis, subject to that tax year's statutory dollar cap (a $1,560 cap for 2006) and limited by the taxpayer's actual Utah taxable income for the year. This holds true whether or not the taxpayer already deducted the original contribution on another state's return, and regardless of whether the other state imposes its own recapture — Utah's revenue and rules aren't affected by another state's tax treatment. Rollovers from a Coverdell ESA or qualified U.S. Savings Bonds (Series EE issued 1990+ or Series I) into a Utah SAVINGS PLAN account likewise qualify for the deduction, since contributions "from any source" qualify. Rollovers OUT of a Utah SAVINGS PLAN account into another state's 529 plan, however, are treated as non-qualified disbursements: because the funds weren't used for "qualified higher education costs" (defined at § 53B-8a-102(8) as certified tuition, fees, room and board, books, supplies, and equipment), any Utah deduction previously claimed on those funds is subject to recapture on a pro-rata basis, per §§ 59-10-114 and 59-7-105.

What this means for you

Utah residents with an out-of-state 529 plan considering a rollover

If you move funds from another state's 529 plan into Utah's own plan, this ruling says you get to claim Utah's income tax deduction on the full rolled-over amount (not just your original contribution basis) in the year the funds land in the Utah account — subject to that year's dollar cap and your own Utah taxable income. It doesn't matter whether you already got a deduction from the other state, or whether that state claws one back from you.

Utah SAVINGS PLAN / UESP / my529 account holders considering moving money to another state's plan

Be aware this ruling treats an outbound rollover to a non-Utah 529 plan as a non-qualified disbursement — any Utah deduction you previously claimed on those funds gets recaptured (added back to Utah taxable income) on a pro-rata basis, the same as if you'd withdrawn the money for a non-educational purpose.

Accountants and tax preparers handling 529 plan clients

This ruling is a useful, still-conceptually-relevant illustration of how Utah's Tax Commission reasons about the fungibility of rolled-over education-savings money and applies a practical (rather than hyper-literal) reading of the deduction statute. But the specific numbers and even the plan's name are dated — confirm the current dollar cap and citation numbering (the plan has since been renamed my529) before advising a client based on this ruling.

Common questions

Q: If I roll my out-of-state 529 plan into Utah's plan, do I only get a deduction on my original contribution, or the whole account value?
A: Per this ruling, the whole rolled-over amount (both the original contribution and any accumulated earnings) is eligible for the Utah deduction in the year received, subject to the statutory cap and your Utah taxable income for that year.

Q: I already claimed a deduction on my contribution in my old state — can I still get the Utah deduction on the rollover?
A: Yes, according to this ruling — whether another state allowed (or later recaptures) a deduction doesn't affect Utah's separate deduction for the rollover into the Utah account.

Q: Do rollovers from a Coverdell ESA or U.S. Savings Bonds into Utah's plan qualify for the deduction?
A: Yes — the ruling states contributions to the Utah SAVINGS PLAN "from any source" qualify for the deduction.

Q: What happens if I later move money OUT of my Utah 529 account into another state's plan?
A: This ruling treats that as a non-qualified disbursement (since it isn't spent on qualified higher education costs), triggering pro-rata recapture of any Utah deduction you previously claimed on those funds.

Citations and references

Statutes (Utah Code Ann., as in effect in 2006):

• § 59-10-114(2)(i) — the Utah individual income tax deduction for contributions to the Higher Education Savings Incentive Program (the SAVINGS PLAN), subject to the statutory dollar cap ($1,560 for 2006) and limited by the taxpayer's taxable income
• Title 53B, Chapter 8a — the Higher Education Savings Incentive Program itself, including the SAVINGS PLAN's creation
• § 53B-8a-102(8) — defines "qualified higher education costs" (tuition, fees, room and board, books, supplies, required equipment)
• § 53B-8a-106(1)(d) — cross-referenced for the annual dollar-cap calculation
• § 59-7-105 — cross-referenced alongside § 59-10-114 for recapture of previously claimed deductions

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/06-016.pdf

Original ruling text

06-016

REQUEST

Re: Private Letter Ruling request regarding the Utah state income tax deductibility of certain
contributions to and disbursements from Utah Educational Savings Plan accounts.

Dear TP REPRESENTATIVE:

On behalf of the SAVINGS PLAN, I request an expedited private letter ruling concerning
whether the Utah state income tax deduction is allowed for certain types of contributions to and
withdrawals from SAVINGS PLAN accounts.

Background

As you know, SAVINGS PLAN is Utah's official tax-advantaged college savings plan created
pursuant to Section 529 of the Internal Revenue Code of 1986, as amended ("Section 529", and a
"529 plan" generally). SAVINGS PLAN was established in 1996 by the Utah State Legislature
in Utah Code Annotated ("UCA") 53-B-8a. The Legislature also granted a Utah state income tax
deduction for contributions to SAVINGS PLAN in UCA 59-10-114.

The United States Congress authorized the creation of 529 plans through the Internal Revenue
Code because it recognized that favorable tax treatment was crucial to encourage citizens to save
for the future college expenses of their children and grandchildren. The Utah State Legislature
endorsed the creation of a Utah 529 plan, SAVINGS PLAN, and recognized that an educated
populace was important if the State of Utah were to remain competitive in the global
marketplace. It is no accident that both the federal and state income tax codes have played a role
in the creation and expansion of 529 plans generally and the success of SAVINGS PLAN
specifically.

Please note that UCA 53B-8a 114 reflects this legislative intent by providing for liberal
interpretation of the law regarding SAVINGS PLAN. It is SAVINGS PLAN understanding
based on the legislative history and plain meaning of the statues that the Utah State Legislature
intended to encourage our Utah residents and taxpayers to save for the costs of higher education
in a tax favored manner. In addition, the Legislature's authoritzation of a state tax deduction for
Utah taxpayers for contributions to SAVINGS PLAN represents its intent to give preferential tax
treatment to such contributions. Only contributions to SAVINGS PLAN qualify for a Utah state
income tax deduction. Contributions to non-SAVINGS PLAN 529 plans do not qualify for the
deduction. At this time, 26 other states plus the District of Columbia offer a state tax deduction
to their taxpayers for contributions into their own 529 plans. Only one state, Maine, offers a
state tax deduction to its taxpayers who contribute to any state's 529 plan.

SAVINGS PLAN respectfully requests your review of the following situations that affect the
state tax treatment of certain contributions to or disbursements from SAVINGS PLAN accounts.
With respect to each matter, we have posted a situation, the tax question(s) presented, and a
preferred response. In all cases, the questions posed relate to the tax impact on individual
taxpayers (as opposed to trusts or corporations).

1. Rollovers into SAVINGS PLAN from another 529 plan

Situation 1:
SAVINGS PLAN account owner who is a Utah taxpayer previously invested in a 529
plan of another state and now wishes to roll over the money from that non-SAVINGS
PLAN 529 plan into SAVINGS PLAN. No deduction was claimed when the original
contribution was made to the non-SAVINGS PLAN 529 plan.

   Question:
   Is the rollover into SAVINGS PLAN considered a contribution eligible for the Utah state
   income tax deduction? If so, is the entire contribution eligible for the state income tax
   deduction or is only the basis portion (not the earnings portion) of the contribution
   eligible? Does the answer depend on when the account owner established and
   contributed funds to the non-SAVINGS PLAN account?

   Preferred response:
   Consistent with the legislative intent to encourage Utah taxpayers to save for college and
   make contributions through SAVINGS PLAN, the Tax Commission will allow rollovers
   from other 529 plans to SAVINGS PLAN to be eligible for the Utah state income tax
   deduction in the tax year that the rollover funds are received and recorded by SAVINGS
   PLAN. The amount rolled over into SAVINGS PLAN that qualifies for a state tax
   deduction will be subject to that calendar year's dollar limits. This decision is not
   dependent on when the account owner established and contributed funds to the non-
   SAVINGS PLAN account.

   Situation 2:
   A non-Utah taxpayer previously invested in a 529 plan of another state but moves to Utah
   during the current tax year and now wants to rollover the money from the non-SAVINGS
   PLAN 529 plan into SAVINGS PLAN. This new Utah resident may have previously
   received a state income tax deduction for his contributions on his non-Utah state income
   tax return. However, upon rolling over his funds from the non-SAVINGS PLAN 529
   plan to SAVINGS PLAN he may be subject to recapture of any deductions previously
   claimed on prior non-Utah state income tax returns.

Questions:
Is the rollover into SAVINGS PLAN considered a contribution eligible for the Utah state
income tax deduction? If so, is the entire contribution eligible for the state income tax
deduction or is only the basis portion (nor the earnings portion) of the contribution
eligible? Does the answer change if the account owner previously received a state
income tax deduction for the contribution to the non-SAVINGS PLAN 529 plan?

Preferred response:
Consistent with the legislative intent to encourage Utah taxpayers to save for college and
make contributions through SAVINGS PLAN, the Tax Commission will allow the total
amount of the rollover from non-SAVINGS PLAN 529 plan into to be eligible for the
Utah state income tax deduction in the tax year the rollover funds are received by
SAVINGS PLAN. The amount rolled over into SAVINGS PLAN that qualifies for a
Utah state income tax deduction will be subject to that calendar year's dollar limits.

2. Rollovers Into SAVINGS PLAN from Coverdell ESAs or a Qualified U.S. Savings
   Bond (Interest on Series EE Bonds Issued January 1990 and Later and Interest on
   Series I Bonds)

Situation 3:
Under Section 529 (see also the enclosed IRS Publication 970), contributions from the
proceeds of Coverdell Education Savings Accounts (a "Coverdell ESA") and certain U.S.
Savings Bonds (specifically, Series EE and Series I) are permitted on a tax-free basis if
the funds are deposited in a 529 plan within 12 months of liquidation of the Coverdell
ESA or the U.S. Savings Bonds. Federal tax law requires that the account owner furnish
a breakout between basis and earnings when depositing these moneys into a 529 plan. Of
the states that allow a state tax deduction for contributions to their 529 plan, SAVINGS
PLAN is not aware of any state that does not allow such contributions to be deductible
for state income tax purposes.

Questions:
Are rollovers of liquidated funds from a Coverdell ESA or qulaified U.S. Savings bonds
eligible for the Utah state income tax deduction?

Preferred Response:
Contributions to SAVINGS PLAN that are rollovers of liquidated Coverdell ESAs or
qualified U.S. Savings Bonds are elegible for the Utah state icome tax deduction.

3. Rollovers Out of SAVINGS PLAN Into Another 529 Plan

Situation 4:

On occasion, SAVINGS PLAN account owners withdraw funds for purposes other than
qualified higher education expenses. Federal and state tax laws are clear that in the tax
year of an unqualified disbursement, the earnings portion of the disbursement must be
included in taxable income (UCA 59-10-114) and, from a state tax perspective,
previously claimed Utah state income tax law is silent on whether rollovers from
SAVINGS PLAN to a non-SAVINGS PLAN 529 plan (which, if done on a timely basis,
are allowable without federal tax penalty) should be treated as unqualified disbursements
for state income tax recapture purposes.

Question:
When a Utah account owner and taxpayer roll over funds out of SAVINGS PLAN and
into a non-SAVINGS PLAN 529 plan, must the Utah account owner and taxpayer
recapture any Utah state income tax deductions claimed in a prior year? If so, how
should the taxpayer calculate the amount subject to recapture?

Preferred response:
To be consistent with allowing a rollover into SAVINGS PLAN as eligible for the Utah
state income tax deduction, any rollovers out of SAVINGS PLAN should be subject to
recapture of any Utah state income tax deduction previously claimed in a prior year. The
recapture amount should be equivalent to a pro-rata amount of the deduction previously
claimed.

As stated earlier in this letter, 26 other states and the District of Columbia offer a state tax
deduction for their own 529 savings plan. If you would like state specific information on
the deduction, please let me know. We will be happy to provide the information if it
enhances your review of our request.

Should you disagree with our proposed responses, we respectfully request that your
rulings apply prospectively beginning as of January 2, 2007.

As you consider the questions we have posed and the preferred responses we have
provided in this submission, plese donot hesitate to contact me for clarification or
additional information. I am also e-mailing this request so as to provide you with an
electronic copy to assist you in your response to our request. Thank you for your
consideration.

Sincerely,

NAME
TITLE

Cc: 2ND TPREPRESENTATIVE, DIVISION

                                                        August 3, 2006

NAME
ADDRESS

Re: Private Letter Ruling 06-016
Tax deductions for contributions to a SAVINGS PLAN account

Dear NAME,

    This letter is in response to your request for tax guidance. This letter ruling is not

intended as a statement of broad Tax Commission policy. It is an interpretation and application
of the tax law as it relates to the facts presented in your request letter. If the facts are not
correctly described in this letter ruling, please let me know so we can assure a more accurate
response to your circumstances.

                                  Analysis and Ruling

   Utah law authorizes tax-advantaged contributions to college savings accounts under the

SAVINGS PLAN. Utah Income Tax law allows a tax deduction for contributions to a Higher
Education Savings Incentive Program. The deduction is in the amount included in the federal
taxable income that was derived from money contributed to a Higher Education Savings
Incentive Program, subject to the limitations set out in Title 53B of the Utah Code. Utah tax law,
in Utah Code Ann. §59-10-114 (2) (i) authorizes a deduction as follows:

   the amount included in federal taxable income that was derived from
   money paid by an account owner to the program fund under Title 53B,
   Chapter 8a, Higher Education Savings Incentive Program, not to exceed
   amounts determined under Subsection 53B-8a-106(1)(d), and investment
   income earned on account agreements entered into under Section
   53B-8a-106 that is included in federal taxable income, but only when the
   funds are used for qualified higher education costs of the beneficiary;

   With regard to SAVINGS PLAN contributions and savings, you have asked for tax advice

based on the following scenarios:

ROLLOVERS FROM ANOTHER STATE'S 529 PLAN

   1.A Utah taxpayer contributed to a 529 plan in another state, but did not claim a tax

deduction for that contribution. Now that taxpayer wants to roll over the investment to a
SAVINGS PLAN account. You ask if the rollover is considered a contribution to SAVINGS
PLAN for purposes of the income tax deduction.

     Utah Code Ann. §59-10-114 (2) (i) can be read to allow a deduction only for

contributions from taxable income earned in the same tax year that the deduction is taken. This
strict reading of the statute disallows a deduction for contributions from other sources, such as
personal savings accounts or proceeds from the sale of property. It is possible that the
Legislature, in fact, intended to encourage SAVINGS PLAN accounts as a means to create new
savings rather than transferred savings. However, due to the fungibility of money, the Tax
Commission cannot monitor the source of the money contributed and, therefore, cannot enforce
such a provision. Therefore, we look for another reasonable reading of the statute.

    Utah does not recognize plans established in other states. Therefore, when a taxpayer

contributes to a SAVINGS PLAN account, it is treated as a contribution to a SAVINGS PLAN
account in the tax year in which it occurs regardless of the source of the money so long as the
taxpayer has taxable income in that year. Under this reading of the law, the taxpayer may take a
deduction in Utah for amounts rolled over from another account. The amount of the deduction is
limited by the statutory cap and by the taxpayer's Utah taxable income. That is, for 2006, a
deduction of up to $1560 is allowed so long as the taxpayer has at least $1560 in taxable income.
Any amount in excess of the statutory cap or the taxable income is not deductible.

    One other, more specific, concern we raise is that if funds are transferred under a

qualified rollover, a taxpayer would be allowed to maintain the exclusion from federal income
taxes for interest earned on the original contribution. Thus, in contrast with withdrawing funds
from a normal savings account, where interest would be subject to tax, the qualified rollover
would have no federal or state tax consequences. At the same time, we recognize that taxpayers
may withdraw funds from investments and money accounts that are also subject to various
exemptions or deductions for federal and state tax purposes. Taking these points into account,
the Commission believes that it would be contrary to the stated public policy for educational
savings plans, to force a taxpayer to lose a federal tax benefit in order to establish state tax
benefit. Consequently, we find that a taxpayer would still qualify for the deduction from state
income tax as indicated in the preceding paragraph.

    2.A non-resident contributed to a savings plan in another state. Upon moving to Utah in

the current tax year, the account owner wants to roll that out-of-state account into a SAVINGS
PLAN account, subjecting the taxpayer to recapture of any deductions previously claimed in the
other state. You ask whether all or some of the rollover (principal and interest) is eligible for
the Utah state tax deduction. You also ask about the impact of any tax deduction claimed in the
other state.

    As stated in response to number 1 above, any amount contributed to establish the

SAVINGS PLAN is eligible for a deduction in Utah, subject to the statutory cap and limited by
the amount of the taxpayer's Utah income for that tax year. Whether the other state allows a tax
deduction or provides for recapture of the deduction is not a matter that impacts Utah's revenues
or the application of Utah income tax law. As stated above, the taxpayer is allowed a deduction
in Utah for the contribution made to establish the SAVINGS PLAN account without regard to tax
implications in other states.

ROLLOVERS INTO SAVINGS PLAN FROM COVERDELL ESA's OR QUALIFIED US
SAVINGS BONDS

   Federal law recognizes a tax-free rollover of Coverdell ESA fund and US Savings Bonds.

You have asked if rollovers from these accounts to a SAVINGS PLAN account qualify for
deduction.

   Contributions to accounts from any source qualify for the deduction.

RECAPTURE OF UTAH DEDUCTIONS AFTER ROLLOVER FROM A SAVINGS
PLAN ACCOUNT TO A NON-SAVINGS PLAN ACCOUNT.

   SAVINGS PLAN account holders may withdraw funds from the SAVINGS PLAN

account and roll those funds over to another state's plan. You asked if this disbursement out of
the SAVINGS PLAN is considered a non-qualified disbursement, subjecting it to recapture in
Utah.

    Utah law imposes tax on unqualified disbursements to the extent that they were deducted

on a Utah return in previous tax years if the funds are not used for qualified higher education
costs of the beneficiary. Qualified higher education costs are defined in Utah Code Ann.
§53B-8a-102 (8) as "certified costs of tuition, fees, room and board, books, supplies, and
equipment required for the enrollment or attendance of a designated beneficiary at an institution
of higher education." A disbursement for any other purpose subjects the disbursement to
recapture to the extent of the amount that was deducted on previous Utah tax returns. (See Utah
Code Ann. §§59-10-114 and 59-7-105) An investment in another account, even for an
educational savings plan in another state, is not a qualified contribution, and is thus subject to
recapture.

PROSPECTIVE APPLICATION

    Regarding the issue of prospective application, it appears that our response is consistent

with your preferred response. The statutory language sets out a system of recapture for funds
rolled out of SAVINGS PLAN accounts and allows a deduction for rolling into a Utah account.
An account holder who failed to comply with the recapture provisions may be subject to audit,
and could be liable for any unpaid taxes attributable to funds that were rolled out of the
SAVINGS PLAN. An account holder who failed to claim a deduction for rolling funds into a
new Utah account may file an amended return to claim the deductions within the statutory period
allowed.

                                                        For the Commission,


                                                        Marc B. Johnson
                                                        Commissioner

06-016
MBJ/IR