Tax Type
Individual Income Tax
Description
Virginia prepaid tuition; Virginia savings trust account
Topic
Constitutional Provisions
Documents Subject to Tax
Date Issued
04-11-2006
April 11, 2006
Re: Ruling Request: Individual Income Tax
Dear ****************:
This is in reply to your letter in which you request a ruling regarding the individual income tax deduction for the purchase of a Virginia prepaid tuition (VPEP) contract and contributions to a Virginia savings trust account (VEST). You present three questions addressed below.
RULING
Generally
Virginia Code § 58.1-322 D 7 provides an individual income tax deduction for the purchaser of a VPEP contract and to a contributor to a VEST. The deduction per contract for a taxable year is limited to the lesser of the amount paid during the year, or $2,000. To the extent the purchase price or the amount paid during the year exceeds $2,000 per contract, the remainder may be carried forward and deducted in future taxable years, until the purchase price has been fully deducted. Taxpayers who are age 70 or older can deduct the entire purchase price or contribution amount up to their total Virginia taxable income and carry forward the remainder, if any.
Does the deduction for the purchaser of a prepaid tuition contract pass through to the grantor of a grantor's trust if the purchaser of the contract was the trust?
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meanings as provided in the Internal Revenue Code ("IRC") unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). As such, any income included in the FAGI of a Virginia resident is subject to taxation in Virginia, unless it is specifically excluded by a Virginia modification pursuant to Va. Code § 58.1-322.
Under the grantor trust rules, a person (the grantor) who transfers property to a trust and retains certain powers or interests is treated as the owner of the trust for income tax purposes. As a result, the income and deductions attributable to the trust are reported by the grantor on his income tax return. See IRC § 671.
Virginia follows the federal tax treatment of the grantor. As such, the grantor of a grantor's trust is entitled to take the Virginia individual income tax deduction for the amounts paid by the trust for a VPEP contract or contributed to a VEST.
2. Can the transferee of a VPEP contract use the deductions for the transferor's payments or contributions if the transferor was unable to use such deductions?
The Department previously addressed this issue in Public Document 00-216 (12/07/00). Virginia Code § 58.1-322 D 7 states:
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- In the case of a transfer of ownership of a prepaid tuition contract or savings trust account, the transferee shall succeed to the transferor's tax attributes associated with a prepaid tuition contract or savings trust account, including, but not limited to, carryover and recapture of deductions.
As such, the transferee of a plan may use the full amount of deductions for the transferor's payments or contributions when the transferor was not able to use the deductions.
3. Can a purchaser or contributor deduct the remainder of his payments or contributions upon reaching age 70?
Virginia Code § 58.1-322 D 7 clearly states that a purchaser of a VPEP contract or a VEST who has attained the age of 70 is not subject to the limitation that the amount of the deduction not exceed $2,000 per VPEP contract or VEST in any taxable year. Therefore, once a purchaser or contributor reaches age 70, the deduction allowed is equal to the full amount paid or contributed, less any amounts previously deducted without regard to the $2,000 limitation. Any excess deductions that the taxpayer is unable to claim against Virginia taxable income would be carried over to the succeeding taxable year.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/56889B
Related Documents
Rulings of the Tax Commissioner