Introduction

Certain states and, beginning in 2002, educational institutions maintain programs that allow you to either prepay a student's tuition or contribute to an account established for paying a student's qualified higher education expenses (defined later). If you prepay tuition, the student (beneficiary) will be entitled to a waiver or a payment of qualified higher education expenses. You cannot deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or educational institution that established and maintains it.

For 2001, no tax is due on earnings based on the prepayments or contributions unless the earnings were distributed. The student pays tax on the earnings if they were distributed. Because payments and contributions were not deducted, any tax due on them has already been paid. Therefore, if amounts were distributed from the program, tax is due only on the part of the distribution that represents earnings on the payments or contributions. See Are Distributions Taxable, later, for more information.

Note. Even if a QTP is used to finance a student's higher education, the student or the student's parents still may be eligible to claim either the Hope credit or the lifetime learning credit.

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