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Gay Couples Can Open 529 Savings Plans for Each Other, But Watch Out When Changing Beneficiaries

An Iowa man married to his partner sent me an email with some questions about the tax treatment for 529 college savings plans for gay couples. Specifically, he wanted to know

  1. Can he set up a 529 plan with his same sex spouse as a beneficiary?
  2. If so, can he deduct contributions to the plan for state income tax purposes?
  3. Will distributions from the 529 plan to his same sex spouse be subject to federal tax penalties?

The short answer is that same sex beneficiaries pose no issues for setting up a new 529 plan. The beneficiary does not need to be related to the contributor. So same sex partners, married or not, are fine.

Whether contributions are deductible depends on a particular's state plan. For the Iowa 529 plan, Iowa residents can deduct up to $2,800 per beneficiary from state income tax. But no deductions are allowed for federal tax purposes.

Finally, distributions made to same sex partner beneficiaries will not be subject to federal tax penalties as long as other requirements of 529 plans are met.

So when does family relation matter?

The Iowa man would face problems if he were to change the beneficiary of the 529 plan from his same sex partner to himself or someone in his immediate family.

Federal law allows people to change the beneficiary of 529 savings plans without tax penalty, but only if the new beneficiary is a members of the original beneficiary's family. Spouses count as family members, but the IRS does not recognize married same sex couples as spouses.

The in-laws of the beneficiary count as well, but again, the non-recognition of gay marriage means that the new beneficiary could not be one of these people without tax penalties.

But members of a family do include people that both (1) live with the beneficiary and (2) are part of the beneficiary's household. Clearly, the Iowa couple lives together. But are they part of the same household?

Maybe, maybe not. Head of household rules have nothing to do with spouses, but rather children and siblings. On the other hand, federal law only says that someone will not be considered as a member of someone else's household if the relationship violates local law.

Ultimately, I think a same sex couple that lives together could successfully argue that they are members of a family and could change the beneficiary between themselves without penalty

Gideon Alper

Gideon Alper

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