Qualified Tuition Programs (QTPs)

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Qualified Tuition Programs (QTP), formerly called Qualified State Tuition Programs (QSTP), are established and maintained to allow either prepaying, or contributing to an account established for paying a student's qualified higher education expenses at an eligible educational institution. QTPs can be established and maintained by a state or an agency or instrumentality of the state. QTPs can also be established and maintained by one or more eligible educational institutions only for prepaying qualified higher education expenses.

An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.

Your state government or educational institution in which you are interested can tell you whether or not they participate in a QTP.

Contributions to QTP — Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. Contributions made to a QTP are not deductible on your Federal tax return.

Distributions from QTP, Rollovers and Transfers — The earnings from a distribution from a QTP established and maintained by a state (or an agency or instrumentality of the state) can be excluded from gross income if the amounts distributed are used to pay qualified higher education expenses. Beginning in 2004, this tax free treatment will be available for distributions from QTPs established and maintained by eligible educational institutions if the amount distributed is used to pay qualified higher education expenses. For state programs (and, beginning in 2004 for programs established and maintained by eligible educational institutions) if the entire distribution is not used for qualified higher education expenses, an additional 10% tax may be imposed on the earnings part of the distribution that is included in gross income.

Qualified higher education expenses means tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. If the beneficiary is at least a half-time student, certain room and board expenses may also be qualified higher education expenses. The maximum room and board allowance is the amount applicable to the student in calculating cost of attendance for financial aid purposes, or, in the case of a student living in housing owned or operated by the eligible educational institution, the actual amount charged the student by the educational institution for room and board. Qualified higher education expenses also include expenses of a special needs beneficiary that are necessary for that person's enrollment or attendance at an eligible institution.

You can rollover or transfer amounts in a QTP, tax free, to another QTP set up for the same beneficiary or for a member of the beneficiary's family. A rollover must be completed within 60 days of the distribution. Only one rollover can be made within any 12-month period for the same beneficiary.

For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.
  1. Son or daughter or descendant of son or daughter
  2. Stepson or stepdaughter
  3. Brother, sister, stepbrother, or stepsister
  4. Father or mother or ancestor of either
  5. Stepfather or stepmother
  6. Son or daughter of brother or sister
  7. Brother or sister of father or mother
  8. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in law
  9. The spouse of any individual listed in 1-8, and
  10. First cousins of the beneficiary.

You can claim the Hope Credit or Lifetime Learning Credit in the same year you receive a tax free distribution from a QTP if the distribution from the QTP is not used for the same expenses for which the credit is claimed.

You can make contributions to a Coverdell ESA and a qualified tuition program in the same year for the same beneficiary.

For additional information, refer to Publication 970, Tax Benefits for Education .

Source: IRS.gov

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