College tuition prepayment plans are exactly what their name implies, prepayment plans.
Savings plan trusts are tax deferred accounts in which the earnings build up tax free.
In general, earnings on qualified tuition programs are free from tax within the program
or account. When withdrawals are made from a qualified tuition program, the earnings will
be included in the student's taxable income on his/her tax return. However, to the extent that a distribution
from a qualified tuition program is used to pay qualified tuition and fees, an
American Opportunity Tax Credit or Lifetime Learning Tax Credit with respect to such tuition and fees will be available
to the student or other qualified taxpayer (assuming that the other requirements are
satisfied and the modified AGI phase out for those tax credits does not apply).
Contributions to qualified tuition programs qualify for the annual $10,000 gift
tax exclusion, and you may elect to treat a contribution to a qualified tuition
program as if made over a five tax year period for purposes of the annual $10,000 gift tax
For example, if you transfer $30,000 to a qualified
tuition program to benefit
your child, the transfer is considered a gift that qualifies for the annual $10,000 gift
tax exclusion. In addition, you may make an election to treat the gift as if made over
five tax years. If made, you will be deemed to have made a $6,000 gift ($30,000 divided by
five tax years) that qualifies for the annual gift tax exclusion in each of the five