Could a South Carolina Future Scholar 529 account pay K-12 public, private, or religious school tuition tax-free?

Plain-English summary

South Carolina treated up to $10,000 per year per beneficiary withdrawn from its Future Scholar 529 plan for K-12 tuition as a qualified, tax-free withdrawal beginning with tax year 2018.

The tuition could be for enrollment or attendance at a public, private, or religious elementary or secondary school. The $10,000 annual limit applied per beneficiary regardless of how many 529 plans contributed to the tuition payment.

The federal Tax Cuts and Jobs Act added K-12 tuition to the expenses covered by I.R.C. § 529. South Carolina's plan definition allowed withdrawals permitted by the amended federal section, and the State Treasurer's Office confirmed the treatment for Future Scholar.

For South Carolina income tax:

• earnings remained excluded while held in the plan or withdrawn through a qualified withdrawal;
• eligible contributions and qualifying rollovers into Future Scholar could support the South Carolina deduction described in the letter; and
• a nonqualified withdrawal made its earnings portion taxable and required principal to be recaptured to the extent the contribution had previously been deducted from South Carolina taxable income.

A K-12 tuition withdrawal above $10,000 per beneficiary for the year was nonqualified to the extent of the excess under the rule described.

What this means for you

Parents and account owners paying K-12 tuition

Track the total withdrawn for each beneficiary across every contributing 529 plan. The limit did not reset for each account.

Taxpayers who claimed a South Carolina contribution deduction

Using funds for a nonqualified purpose can affect both earnings and previously deducted principal, so preserve contribution and withdrawal records.

Kindergarten tuition

The letter notes that, for South Carolina, a child generally had to be age five on or before September 1 of the school year to enroll in kindergarten.

Common questions

Q: What was the annual K-12 tuition limit?
A: $10,000 per beneficiary across all contributing 529 plans.

Q: Did public-school tuition qualify?
A: Yes, along with private and religious school tuition.

Q: Was a qualified withdrawal taxable by South Carolina?
A: No, under the treatment beginning in tax year 2018.

Q: What happened if the withdrawal was not qualified?
A: The earnings portion became taxable, and previously deducted principal could be recaptured into South Carolina income.

Citations and references

• I.R.C. § 529(c)(7), (c)(6), and (e)(3)
• S.C. Code Ann. §§ 12-6-1140(11), 59-2-30(12), and 59-2-80
• Tax Cuts and Jobs Act of 2017
• IRS Notice 2018-58 and IRS Tax Topic No. 313, as cited in the letter
• S.C. Code Ann. §§ 12-4-320 and 1-23-10(4); SC Revenue Procedure #09-3

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/IL20-14.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC INFORMATION LETTER #20-14

SUBJECT:

Future Scholar, South Carolina’s 529 College Savings Plan – Qualifying
Expenses for Tuition in Kindergarten through Grade 12 Public, Private, or
Religious Schools
(Income Tax)

DATE:

June 11, 2020

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

An Information Letter is a written statement issued to the public to announce
general information useful in complying with the laws administered by the
Department. An Information Letter has no precedential value.

INTRODUCTION
Internal Revenue Code Section 529, “Qualified Tuition Programs,” allows state sponsored
education savings programs. The South Carolina College Investment Program is South
Carolina’s 529 plan. South Carolina’s plan is administered by the State Treasurer’s Office as
provided for in Title 59, Chapter 2, and is commonly known as “Future Scholar, South
Carolina’s 529 College Savings Plan.”
In general, the funds in a 529 plan grow tax deferred and are not taxable when withdrawn
provided the funds are used to pay qualified education expenses. Code Section 59-2-80 provides
South Carolina income tax treatment of earnings and withdrawals from the South Carolina
College Investment Program.
As a result of amendments to Internal Revenue Code Section 529 in 2017, the State Treasurer’s
Office and the Department have received questions regarding the tax treatment of withdrawals
from the South Carolina College Investment Program used to pay tuition for enrollment in
kindergarten through grade 12 (K-12) public, private, or religious schools.

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INTERNAL REVENUE CODE AMENDMENTS
Prior to the 2017 Internal Revenue Code amendments, a withdrawal from a 529 plan was a
qualified withdrawal only if it was used to pay for qualified higher education expenses. Internal
Revenue Code Section 529(e)(3) defines a “qualified higher education expense” as “tuition, fees,
books, supplies and equipment required for enrollment or attendance at an eligible education
institution.” Internal Revenue Code Section 529(e)(5) generally defines an eligible education
institution as higher education institutions.
As part of the “Tax Cuts and Jobs Act of 2017,” Internal Revenue Code Section 529(c)(7) was
added, effective tax year 2018, to provide that:
any reference in this subsection [subsection c] to the term “qualified higher
education expense” shall include a reference to expenses for tuition in connection
with enrollment or attendance at an elementary 1 or secondary public, private, or
religious school.
Internal Revenue Code Section 529(e)(3)(A) further provides that qualified withdrawals for K-12
tuition are limited to $10,000 per year per beneficiary regardless of the number of contributing
plans.
SOUTH CAROLINA’S 529 COLLEGE SAVINGS PLAN – WITHDRAWALS FOR K-12
TUITION
The South Carolina College Investment Program defines a “qualified withdrawal” as a
withdrawal by an account owner or beneficiary for qualified higher education expenses or as
otherwise permitted under Section 529 of the Internal Revenue Code, as amended, without a
penalty required by Internal Revenue Code Section 529(c)(6). See Code Section 59-2-30(12).
The State Treasurer’s Office has confirmed that based upon the Internal Revenue Code, as
amended, the South Carolina College Investment Program allows qualified withdrawals to
include up to $10,000 of tuition per year per beneficiary (regardless of the number of
contributing plans) for K-12 public, private, or religious schools during any taxable year
beginning in tax year 2018. 2
SOUTH CAROLINA INCOME TAX IMPLICATIONS
Code Section 59-2-80 provides the South Carolina income tax implications of participating in the
South Carolina College Investment Plan (“SCCIP”).

1

The Internal Revenue Service has interpreted this provision to include tuition for kindergarten as determined under
State law. See IRS Notice 2018-58 and IRS Tax Topic No. 313, Qualified Tuition Programs. For South Carolina
purposes, a child must be age 5 on or before September 1 of the school year to enroll in kindergarten.
2
Confirmation provided to the Department by the South Carolina State Treasurer’s Office via e-mail January 21,
2020.

2

Code Sections 12-6-1140(11) and 59-2-80(D) provide a South Carolina income tax deduction for
eligible contributions to the South Carolina College Investment Program by a resident or a
nonresident, up to the maximum contributions allowed, including funds transferred from another
qualified 529 plan to the South Carolina College Investment Program. 3
Code Section 59-2-80(B) provides for the exclusion from gross income of the earnings on
investments and reads, in part:
Any interest, dividends, gains, or income accruing on the payments made
pursuant to an investment trust agreement under the terms of this chapter
or on any account in the SCCIP Trust Fund shall be excluded from the
gross income of any such account owner, contributor, or beneficiary for
purposes of South Carolina income taxes, to the extent such amounts
remain on deposit in the SCCIP Trust Fund or are withdrawn pursuant to a
Qualified Withdrawal.
Based upon Internal Revenue Code Section 529, as amended, South Carolina Code Title 59,
Chapter 2, and confirmation from the administrator of South Carolina’s 529 plan, qualified
withdrawals from the South Carolina College Investment Program include withdrawals up to
$10,000 per year per beneficiary to pay for tuition at a K-12 public, private, or religious school.
These qualified withdrawals are not taxed for South Carolina income tax purposes beginning tax
year 2018.
Note: Code Section 59-2-80(C) provides for the taxation of withdrawals that are not
qualified withdrawals and the recapture of those contributions that were deducted from
South Carolina income, and reads:
The earnings portion of any withdrawals from an account that are not
qualified withdrawals shall be included in the gross income of the resident
recipient of the withdrawal for purposes of South Carolina income taxes in
the year of the withdrawal. Withdrawals of the principal amount of
contributions that are not qualified withdrawals must be recaptured into
South Carolina income subject to tax to the extent the contributions were
previously deducted from South Carolina taxable income.
Accordingly, taxpayers should be aware that withdrawals that are not qualified withdrawals, such
as withdrawals exceeding $10,000 per year per beneficiary used to pay for tuition at a K-12
public, private, or religious school, are taxable in the year of withdrawal to the extent they are
attributable to tax free earnings in the 529 plan. Additionally, withdrawals of the principal
amount of contributions that are not qualified withdrawals are taxable to the extent the
contributions were deducted from South Carolina taxable income pursuant to Code Section 59-280(D).

3

The income tax deduction may be taken in any tax year for contributions and rollovers made during the tax year,
and up to April 15th of the following year, or the due date of the taxpayer’s state income tax return excluding
extensions, whichever is longer.

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QUESTION ABOUT SOUTH CAROLINA’S 529 COLLEGE SAVINGS PLAN
For more information about Future Scholar, South Carolina’s 529 College Savings Plan,
call 1-888-244-5674 or visit futurescholar.com.

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