If Virginia denies a 529 college savings deduction for lack of proof of contributions, what documentation is enough to get the deduction restored on appeal?

Plain-English summary

A Virginia husband and wife claimed deductions on their 2016 individual income tax return for money they put into two Virginia 529 college savings accounts (a prepaid tuition contract and savings trust accounts under the Virginia College Savings Plan). The Department of Taxation reviewed the return, decided the couple hadn't provided enough proof that they actually made these contributions, denied the deductions, and issued an assessment. The couple appealed and submitted additional documentation to back up their claim.

The Tax Commissioner sided with the taxpayers. The wife's paperwork showed a $20,000 cash contribution to a prepaid tuition contract in 2014, in excess of the $4,000 annual deduction cap, and the Department's own records confirmed she had already carried that contribution forward and deducted the maximum $4,000 in both 2014 and 2015 — meaning the 2016 deduction of another $4,000 was simply the next installment of an already-substantiated contribution. The husband, who turned 70 in 2016, submitted evidence of contributions to two separate Virginia 529 prepaid tuition contracts that year; because Virginia Code § 58.1-322.03 7 b lets a contributor age 70 or older deduct the full amount paid in that year (not just $4,000), his entire 2016 contribution was deductible. Since the appeal documentation supported both spouses' contributions, the Tax Commissioner ordered the deductions restored and the 2016 assessment abated.

What this means for you

If Virginia denies your 529 deduction for lack of documentation

This ruling is a reminder that a denied Virginia 529 deduction isn't necessarily the final word — if the Department's initial review found your proof of contribution lacking, you can appeal under Va. Code § 58.1-1821 and submit further documentation showing the contribution actually occurred (such as records of the payment and the account it went into). It also illustrates the two different deduction rules that can apply: contributors under 70 are capped at $4,000 per contract or account per year (with any excess carried forward to future years), while a contributor who has reached age 70 can deduct the full amount contributed that year, less amounts already deducted. Keeping account statements or contract records tied to the specific tax year — and matching them up with what you previously claimed — is what let this couple prevail.

Common questions

Q: How much of a Virginia 529 contribution can most people deduct in a single year?
A: Under Va. Code § 58.1-322.03 7 a, the deduction is generally limited to $4,000 per prepaid tuition contract or savings trust account per taxable year, with any amount above that carried forward and deducted in future years.

Q: Does the $4,000 cap apply to everyone?
A: No. Va. Code § 58.1-322.03 7 b allows a purchaser who has reached age 70 to deduct the full amount paid for the contract or account in that year, minus any amounts already deducted — which is why the husband in this ruling, who turned 70 in 2016, could deduct his entire 2016 contributions to two accounts.

Citations and references

• Va. Code § 58.1-1821 (application for correction of individual income tax assessment)
• Va. Code § 58.1-322.03 7 a (annual $4,000 deduction cap per Virginia 529 prepaid tuition contract or savings trust account, with carryforward of excess)
• Va. Code § 58.1-322.03 7 b (full deduction of amount paid, less prior deductions, for contributors age 70 or older)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-143

Original ruling text

August 18, 2020

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayers, a husband and wife, filed their 2016 Virginia income tax return claiming deductions for contributions made to two Virginia 529 college savings accounts. Under review, the Department denied the deductions because the Taxpayers had not provided substantive evidence that they made contributions to the accounts. The Taxpayers filed an appeal, contending that the submitted documentation shows that they could claim the deduction.

DETERMINATION

Virginia Code § 58.1-322.03 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract or account, the remainder may be carried forward and deducted in future taxable years.

Pursuant to Virginia Code § 58.1-322.03 7 b, a purchaser of a prepaid tuition contract or savings trust account who has attained age 70 is allowed to deduct the full amount paid for the contract or account, less any amounts previously deducted.

The Taxpayers contend that the wife, who was under age 70 in 2016, made a $20,000 contribution to a Virginia 529 account in 2014 that allowed her to deduct the maximum $4,000 in 2016. They assert that the husband, who turned 70 in 2016, was able to deduct the entire amount of his contributions to two separate Virginia 529 accounts in 2016. The Department determined that the documentation provided by the Taxpayers was insufficient to support their contributions.

The Taxpayers provided documentation with their appeal that shows the wife made cash contributions to one prepaid college tuition contract in 2014 in an amount in excess of the $4,000 limitation. The Department’s records establish that the Taxpayers claimed the maximum $4,000 deduction for the wife’s 529 contribution on their 2014 and 2015 Virginia income tax returns. The evidence also shows that the husband made contributions to two separate prepaid college tuition contracts in 2016. Because the Taxpayers have provided documentation supporting their contributions to 529 Virginia savings accounts, the deductions will be allowed and the 2016 assessment will be abated.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3301.B