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.
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.
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