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Lev
Lev, Tax Advisor
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Can I cash a qualified E bond, deposit the funds in a 529 with

Resolved Question:

Can I cash a qualified E bond, deposit the funds in a 529 with my spouse as beneficiary and later (subsequent tax year) change the 529 beneficiary to my grandchild without effecting the original exemption?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!

LEV :

If you cash a qualified E bond - all earnings will be taxable (assuming taxes were not paid on earnings in previous years)
You may not defer tax liability by contributing funds into 529 plan.
Contributions into 529 plans are not deductible on your tax return - you will be able to defer earning within that plan - but not contributions.
Let me know if you need any help or clarification.

Customer:

Section 135 (2) (c) pertaining to E bonds treats a 529(QTP) as a qualified educational expense and also allows such expenses for a spouse or dependents. The section does not permit the allowance(non-tax)for non dependants. No menton is made of beneficiaries of a 529 plan which can be grandchildren? My question is directed to that issue

LEV :

 


Yes - you are correct - sorry for confusion - your contributions into qualified tuition program (section 529) are considerd qualified education expenses for qualified E bond interest exclusion.
According to section 135(2)(c) - http://www.law.cornell.edu/uscode/usc_sec_26_00000135----000-.html
Such term shall include any contribution to a qualified tuition program (as defined in section 529) on behalf of a designated beneficiary (as defined in such section),...
That means the definition of the dependent shoudl be also taken from section 529 - http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000529----000-.html
Thus - you may have your graqndchild as a the designated beneficiary without any limitations.
See in this section..


The term “designated beneficiary” means—

(A)the individual designated at the commencement of participation in the qualified tuition program as the beneficiary of amounts paid (or to be paid) to the program,

(B)in the case of a change in beneficiaries described in subsection (c)(3)(C), the individual who is the new beneficiary, and

(C)in the case of an interest in a qualified tuition program purchased by a State or local government (or agency or instrumentality thereof) or an organization described in section 501(c)(3) and exempt from taxation under section 501(a) as part of a scholarship program operated by such government or organization, the individual receiving such interest as a scholarship.

(2) Member of family
The term “member of the family” means, with respect to any designated beneficiary—

(A)the spouse of such beneficiary;

(B)an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through (G) of section 152(d)(2);

(C)the spouse of any individual described in subparagraph (B); and

(D)any first cousin of such beneficiary.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
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