IRS Tax Forms  
Publication 970 2000 Tax Year

Chapter 8
State Tuition Programs

Certain states maintain programs that allow you to either prepay a student's tuition or contribute to an account established for paying a student's qualified higher education expenses (defined later). If you prepay tuition, the student (beneficiary) will be entitled to a waiver or a payment of qualified higher education expenses. You cannot deduct either payments or contributions to a qualified state tuition program.

No tax is due on earnings based on the prepayments or contributions until the earnings are distributed. The student pays tax on the earnings when they are distributed. Because payments and contributions are not deducted, any tax due on them has already been paid. Therefore, when amounts are distributed from the program, tax is due only on the part of the distribution that represents earnings on the payments or contributions. See Distributions, later.

NOTE. Even if a qualified state tuition program is used to finance a student's higher education, the student or the student's parents still may be eligible to claim either the Hope credit or the lifetime learning credit.

Caution:

No contributions can be made to an education IRA on behalf of a beneficiary if any amount is contributed during the same year to a qualified state tuition program on behalf of the same beneficiary. Any amount contributed to the education IRA will be treated as an excess contribution to the education IRA. Education IRAs are discussed in chapter 4.

More information. For more information on a specific qualified state tuition program, contact the state or agency that established and maintains it.

What Is a Qualified State Tuition Program?

How Much Can I Contribute?

Distributions

Can I Transfer Amounts or Change Beneficiaries?

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