Compliance September 11, 2009

Bailout Bill Added Computers to Approved 529 Expenses

Among its many provisions, the American Recovery and Reinvestment Act (ARRA) included a rule change for Section 529 tax-free college savings plans and prepaid tuition programs to add computer equipment and services to the list of approved expenses until year-end 2010.

Reported by

According to a briefing paper posted on the Internal Revenue Service (IRS) Web site, qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. Room and board also qualify for someone who is at least a half-time student.

For 2009 and 2010, the ARRA change adds expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. The IRS said covered computer and related peripheral equipment includes any auxiliary machine, which is designed to be placed under the control of the central processing unit of a computer, such as a printer.

Also included are computer software programs used for educational purposes. The tax agency said software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature.

In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit, or tuition and fees deduction, the IRS cautioned.

More information about 529 plans and recent changes to them is available here.

Compliance September 11, 2009

IRS Answers Questions on Taxability of Roth Conversions

In Notice 2009-75, the Internal Revenue Service provides guidance in the form of a Q&A on the tax treatment of eligible rollover distributions from qualified plans into a Roth IRA.

Reported by

The guidance further clarifies that a qualified plan is a qualified plan described in § 401(a), an annuity plan described in § 403(a), a plan described in §403(b), or a governmental § 457(b) plan.

The IRS says that if an eligible rollover distribution from an eligible employer plan is rolled over to a Roth IRA and the distribution is not made from a designated Roth account, then the amount that would be includible in gross income were it not part of a qualified rollover contribution is included in the distributee’s gross income for the year of the distribution. In other words, the amount included in gross income is equal to the amount rolled over, reduced by the amount of any after-tax contributions that are included in the amount rolled over.

The guidance states that the special rules relating to net unrealized appreciation at § 402(e)(4) and certain optional methods for calculating tax available to participants born on or before January 1, 1936, are not applicable.

If an eligible rollover distribution made from a designated Roth account in an eligible employer plan is rolled over to a Roth IRA, the amount rolled over is not includible in the distributee’s gross income.

According to the Notice, before January 1, 2010, individuals with a modified adjusted gross income (MAGI) that exceeds $100,000, and individuals who are married and file a separate return, are not allowed to roll over a distribution from an eligible employer plan to a Roth IRA unless the distribution is made from a designated Roth account. However, at the end of 2009, both the MAGI limit and the separate return limit will expire.

A rollover distribution made before 2010 that is ineligible to be rolled over to a Roth IRA due to the income or filing status restrictions may be rolled over to a non-Roth IRA that can then be converted into a Roth IRA on or after January 1.

Notice 2009-75 is available here.

«