Taking an Ordinary Tax Loss from a 529 Plan
Loss from a 529 plan may be able to be taken as an ordinary loss rather than a capital loss.
The IRS has published in Publication 970 that if you have a 529 plan and the asset's fair market value is less than the original contribution into the plan, then if you completely liquidate the plan, you can take that loss as an ordinary loss, not a capital loss. The proceeds can then be invested in a new 529 plan.
Please note, that if you reinvest the proceeds, you need to wait 60 days to avoid the transaction from being characterized as a qualified rollover. Qualified rollovers, while totally tax free, are not considered a complete distribution of the plan.
Also note that even though this loss is an ordinary loss, it is a miscellaneous itemized deduction subject to the 2% of adjusted gross income limitation. Even worse, if you are subject to Alternative Minimum Tax, you will get no tax benefit from the loss.
If you have a 529 plan that has significant losses in it, please give our office a call to discuss if and how this might help your tax planning.
