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Abuse of the Section 529 Plan

Sec. 529 plan gifts on IRS radar.

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in Small Business Tax

The IRS is putting a gift-giving strategy for Sec. 529 plans under the microscope. Normally, you can transfer up to $12,000 per year to a recipient without any gift-tax consequences. However, under a special rule for Sec. 529 plans, individuals can transfer five years’ worth of contributions—up to $60,000—to the account in just one year without gift-tax consequences. The problem: Some taxpayers are transferring the maximum to the college savings plan and then quickly changing the account beneficiary. This technique reduces the size of the donor’s taxable estate. The IRS intends to curb this practice and similar abuses.

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