Could a married couple avoid the $4,000-per-contract Virginia prepaid-tuition deduction limit because the nonowner spouse was over age 70?

Subject

Virginia College Savings Plan. For purposes of the deduction for a prepaid tuition contract, only a purchaser of the contract can claim the deduction

Plain-English summary

Virginia limited the deductions to $4,000 per prepaid-tuition contract for each year because the husband—not his wife—was the purchaser and owner. He was under age 70 during 2011 and 2012, so his wife's age did not remove the annual limit even though the contributions came from joint assets.

For a prepaid-tuition contract, only the purchaser can claim the deduction. The statute defined that purchaser as the person obligated to make advance payments and listed as the contract owner.

The couple could carry forward contributions above $4,000 per contract and deduct them in later years until fully used. Once the husband reached age 70, the ruling said they could deduct more than $4,000 per contract per year. Questions about changing the contract owner had to go to VA529, the independent agency administering the plan.

What this means for you

• Check whose name appears as owner before claiming a prepaid-tuition deduction.
• A spouse's age does not control the limit when that spouse is not the purchaser-owner.
• Track excess contributions by contract so the unused amount can be carried forward.
• Ownership changes are plan-administration questions for VA529, not resolved by this tax determination.

Common questions

Q: Why did the wife's age not remove the limit?

A: She was not the purchaser-owner of the contracts; the husband was.

Q: What was the annual limit?

A: $4,000 per prepaid-tuition contract for an owner under age 70.

Q: Was the excess contribution lost?

A: No. It could be carried forward and deducted in future taxable years until fully used.

Citations and references

• Va. Code §§ 58.1-322(D)(7)(a) and 23-38.75.
• P.D. 05-123 and P.D. 00-216.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-50

Original ruling text

April 3, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable years ended December 31, 2011 and 2012.

FACTS

The Taxpayers, a husband and wife, filed their joint 2011 and 2012 Virginia income tax returns claiming deductions for contributions to Virginia prepaid tuition contracts purchased by the husband. Because the deductions for each taxable year exceeded the maximum amount allowed by statute for taxpayers under age 70, the Department reduced the deductions and issued assessments for additional tax and interest. The Taxpayers appeal the assessments, contending that the deductions should be allowed because the wife was over age 70 when the contributions were made.

DETERMINATION

Virginia Code § 58.1-322 D 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract, the remainder may be carried forward and deducted in future taxable years.

For purposes of the deduction for a prepaid tuition contract, only a purchaser of the contract can claim the deduction. See Public Document (P.D.) 05-123 (7/25/2005) and P.D. 00-216 (12/7/2000). Under Va. Code § 23-38.75, a "purchaser" is "a person who makes or is obligated to make advance payments in accordance with a prepaid tuition contract and who is listed as the owner of the prepaid tuition contract."

The Department's records indicate that the husband, who was under 70 during 2011 and 2012, was the owner of the two prepaid contracts. As such, the Taxpayers were limited to deducting the maximum $4,000 per prepaid tuition contract in each of the 2011 and 2012 taxable years even though the contributions were paid from the Taxpayers' joint assets.

Virginia Code § 58.1-322 D 7 allows for contributions to Virginia prepaid tuition contracts that exceed $4,000 to be carried over and subtracted in future taxable years. The Taxpayers may carryover the balance of their contribution to future taxable years after 2012 until it is fully utilized. Since taxpayers who have attained age 70 are no longer subject to the $4,000 deduction limitation, the Taxpayers may deduct more than $4,000 per contract per year once the husband attains 70 years of age.

The Taxpayers further indicate the husband was chosen to be listed as the owner because the wife was ill. They request permission to amend the contracts to allow the wife to be named the owner. The Virginia College Savings Plan is administered by VA529, which is an independent state agency. The Taxpayers would need to contact VA529 concerning changes to their contracts.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5862415151.B