SENATE BILL NO. 308

INTRODUCED BY J. BOHLINGER

A BILL FOR AN ACT ENTITLED: "AN ACT GENERALLY REVISING THE FAMILY EDUCATION SAVINGS ACT; ALLOWING AN INCOME TAX DEDUCTION FOR CERTAIN QUALIFIED CONTRIBUTIONS TO A FAMILY EDUCATION SAVINGS ACCOUNT OR TO A K-12 EDUCATION SAVINGS ACCOUNT; EXCLUDING FROM INCOME EARNINGS ON ACCOUNTS WITHDRAWN TO PAY QUALIFIED HIGHER EDUCATION EXPENSES OR QUALIFIED K-12 EDUCATION EXPENSES; IMPOSING A TAX ON CERTAIN WITHDRAWALS OF DEDUCTIBLE CONTRIBUTIONS; CLARIFYING THAT EACH SPOUSE IS ENTITLED TO A DEDUCTION IF A JOINT TAX RETURN IS FILED; REMOVING THE TAX EXEMPTION FOR CONTRIBUTIONS TO A FAMILY EDUCATION SAVINGS ACCOUNT; REQUIRING THAT CONTRIBUTIONS BE HELD ON DEPOSIT FOR 3 YEARS TO QUALIFY FOR FAVORABLE TREATMENT; RESTRICTING ACCESS TO CERTAIN FAMILY EDUCATION SAVINGS ACCOUNT RECORDS; CONFORMING SOME DEFINITIONS TO FEDERAL LAW; AMENDING SECTIONS 15-30-111, 15-62-103, AND 15-62-201, MCA; REPEALING SECTION 15-62-204, MCA; AND PROVIDING EFFECTIVE DATES AND AN APPLICABILITY DATE."

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA:

NEW SECTION. Section 1. Deduction for contributions. (1) An individual who contributes to a family education savings account in a taxable year is entitled to reduce the individual's adjusted gross income, in accordance with 15-30-111(7), by the amount of the contribution, but not more than $3,000, if the contribution is made to an account owned by the contributor, the contributor's spouse, or the contributor's child or stepchild, if the child or stepchild is a Montana resident.

(2) An individual who contributes to a K-12 education savings account in a taxable year is entitled to reduce the individual's adjusted gross income, in accordance with 15-30-111(8), by the amount of the contribution, but not more than $1,000, if the contribution is made to a K-12 education account owned by the contributor, by the contributor's spouse, or by the contributor's child or stepchild if the child or stepchild is a Montana resident.

NEW SECTION. Section 2. Tax on certain withdrawals of deductible contributions. (1) As used in this section, "recapturable withdrawal" means a withdrawal or distribution that is a nonqualified withdrawal, as defined in 15-62-103.

(2) There is a recapture tax at a rate equal to the maximum possible rate applicable under 15-30-103 on a recapturable withdrawal of amounts that reduced adjusted gross income under 15-30-111(7).

(3) For the purpose of determining the portion of a recapturable withdrawal that reduced adjusted gross income, all withdrawals must be allocated between income and contributions in accordance with principles applicable under section 529 (c)(3)(A) of the Internal Revenue Code of 1986, 26 U.S.C. 529 (c)(3)(A). The portion of a recapturable withdrawal that is allocated to contributions must be treated as derived first from contributions, if any, that did not reduce adjusted gross income, to the extent of the contributions, and then to contributions that reduced adjusted gross income. The portion of a qualified withdrawal that is allocated to contributions must be treated as first derived from contributions that reduced adjusted gross income, to the extent of the contributions, and then to contributions that did not reduce adjusted gross income.

(4) (a) The recapture tax imposed by this section is payable by the account owner of the account from which the withdrawal or distribution was made. The tax liability must be reported on the income tax return of the account owner and is payable with the income tax for the year of withdrawal. The account owner is liable for the tax even if the account owner is not a resident of Montana at the time of the withdrawal.

(b) The department may require withholding on recapturable withdrawals from an account that was at one time owned by a resident of Montana if the account owner is not a resident of Montana at the time of withdrawal. For the purposes of this subsection (4)(b), amounts rolled over from an account that was at one time owned by a resident of Montana to an account owned by a nonresident of Montana must be treated as if it were owned by a resident of Montana.

(5) For the purposes of this section, all contributions made to accounts by residents of Montana are presumed to have reduced adjusted gross income unless the account owner can demonstrate that all or a portion of the contributions did not reduce adjusted gross income. Contributors who claim deductions for contributions shall report on their Montana income tax returns the amount of deductible contributions made to accounts for each designated beneficiary and the social security number of each designated beneficiary.

(6) The department shall use all means available for the administration and enforcement of the income tax laws in the administration and enforcement of this section.

NEW SECTION. Section 3. Access to records. Information that identifies the contributors, account owners, or designated beneficiaries of a family education savings account is exempt from the provisions of 2-6-102 and 2-6-104 and any other provisions of law permitting public inspection or copying of documents. The provisions of this section may not be construed to prevent the release of information about a specific designated beneficiary to a higher education institution at which the designated beneficiary is enrolled or to which the designated beneficiary has applied for admission.

NEW SECTION. Section 4. Administration of K-12 education savings account -- withdrawal of funds -- penalty. (1) An account administrator shall administer the K-12 education savings account from which the payment of qualified K-12 education expenses is made and has a fiduciary duty to a person for whose benefit the account is administered. Except for reporting to the department of revenue, the account administrator shall administer a K-12 education savings account as a regular deposit. The account administrator is not responsible for the use or application of funds.

(2) An account administrator may use funds held in the account only for the purpose of paying for qualified K-12 education expenses of the account holder. The account owner may submit documentation of qualified K-12 education expenses paid by the account owner in the tax year to the account administrator, and the account administrator shall reimburse the account owner from the account for qualified K-12 education expenses. The burden of proving that a withdrawal from the account was made for qualified K-12 education expenses is upon the account owner and not upon the account administrator.

(3) The account administrator shall file reports as reasonably required by the department of revenue and is required to forward a 10% penalty on any funds that were withdrawn for other than qualified K-12 education expenses as determined by the department. Payments made to the department must be deposited in the general fund.

Section 5. Section 15-30-111, MCA, is amended to read:

"15-30-111. Adjusted gross income. (1) Adjusted gross income is the taxpayer's federal income tax adjusted gross income as defined in section 62 of the Internal Revenue Code of 1954, 26 U.S.C. 62, as that section may be labeled or amended, and in addition includes the following:

(a) (i) interest received on obligations of another state or territory or county, municipality, district, or other political subdivision of another state, except to the extent that the interest is exempt from taxation by Montana under federal law;

(ii) exempt-interest dividends as defined in section 852(b)(5) of the Internal Revenue Code of 1986, 26 U.S.C. 852(b)(5), as that section may be amended or renumbered, that are attributable to the interest referred to in subsection (1)(a)(i);

(b) refunds received of federal income tax, to the extent that the deduction of the tax resulted in a reduction of Montana income tax liability;

(c) that portion of a shareholder's income under subchapter S. of Chapter 1 of the Internal Revenue Code of 1954 that has been reduced by any federal taxes paid by the subchapter S. corporation on the income;

(d) depreciation or amortization taken on a title plant as defined in 33-25-105(15); and

(e) the recovery during the tax year of an amount deducted in any prior tax year to the extent that the amount recovered reduced the taxpayer's Montana income tax in the year deducted.

(2) Notwithstanding the provisions of the federal Internal Revenue Code of 1954, as labeled or amended, adjusted gross income does not include the following, which are exempt from taxation under this chapter:

(a) (i) all interest income from obligations of the United States government, the state of Montana, a county, municipality, or district, or other political subdivision of the state and any other interest income that is exempt from taxation by Montana under federal law;

(ii) exempt-interest dividends as defined in section 852(b)(5) of the Internal Revenue Code of 1986, 26 U.S.C. 852(b)(5), as that section may be amended or renumbered, that are attributable to the interest referred to in subsection (2)(a)(i);

(b) interest income earned by a taxpayer who is 65 years of age or older in a tax year up to and including $800 for a taxpayer filing a separate return and $1,600 for each joint return;

(c) (i) except as provided in subsection (2)(c)(ii), the first $3,600 of all pension and annuity income received as defined in 15-30-101;

(ii) for pension and annuity income described under subsection (2)(c)(i), as follows:

(A) each taxpayer filing singly, head of household, or married filing separately shall reduce the total amount of the exclusion provided in subsection (2)(c)(i) by $2 for every $1 of federal adjusted gross income in excess of $30,000 as shown on the taxpayer's return;

(B) in the case of married taxpayers filing jointly, if both taxpayers are receiving pension or annuity income or if only one taxpayer is receiving pension or annuity income, the exclusion claimed as provided in subsection (2)(c)(i) must be reduced by $2 for every $1 of federal adjusted gross income in excess of $30,000 as shown on their joint return;

(d) all Montana income tax refunds or tax refund credits;

(e) gain required to be recognized by a liquidating corporation under 15-31-113(1)(a)(ii);

(f) all tips or gratuities that are covered by section 3402(k) or service charges that are covered by section 3401 of the Internal Revenue Code of 1954, 26 U.S.C. 3402(k) or 3401, as amended and applicable on January 1, 1983, received by persons for services rendered by them to patrons of premises licensed to provide food, beverage, or lodging;

(g) all benefits received under the workers' compensation laws;

(h) all health insurance premiums paid by an employer for an employee if attributed as income to the employee under federal law;

(i) all money received because of a settlement agreement or judgment in a lawsuit brought against a manufacturer or distributor of "agent orange" for damages resulting from exposure to "agent orange";

(j) principal and income in a medical care savings account established in accordance with 15-61-201 or withdrawn from an account for eligible medical expenses, as defined in 15-61-102, of the taxpayer or a dependent of the taxpayer or for the long-term care of the taxpayer or a dependent of the taxpayer;

(k) principal and income in a first-time home buyer savings account established in accordance with 15-63-201 or withdrawn from an account for eligible costs, as provided in 15-63-202(7), for the first-time purchase of a single-family residence;

(l) principal withdrawn from a family education savings account or earnings withdrawn from a family education savings account for qualified higher education expenses or principal withdrawn from a K-12 education savings account or earnings withdrawn from a K-12 education savings account for qualified K-12 education expenses, as defined in 15-62-103, of a designated beneficiary ;

(m) the recovery during the tax year of any amount deducted in any prior tax year to the extent that the recovered amount did not reduce the taxpayer's Montana income tax in the year deducted; and

(n) income of a dependent child that is included in the taxpayer's federal adjusted gross income pursuant to the Internal Revenue Code. The child is required to file a Montana personal income tax return if the child and taxpayer meet the filing requirements in 15-30-142.

(3) A shareholder of a DISC that is exempt from the corporation license tax under 15-31-102(1)(l) shall include in the shareholder's adjusted gross income the earnings and profits of the DISC in the same manner as provided by section 995 of the Internal Revenue Code, 26 U.S.C. 995, for all periods for which the DISC election is effective.

(4) A taxpayer who, in determining federal adjusted gross income, has reduced the taxpayer's business deductions by an amount for wages and salaries for which a federal tax credit was elected under sections 38 and 51(a) of the Internal Revenue Code of 1954, as those sections may be labeled or amended, is allowed to deduct the amount of the wages and salaries paid regardless of the credit taken. The deduction must be made in the year that the wages and salaries were used to compute the credit. In the case of a partnership or small business corporation, the deduction must be made to determine the amount of income or loss of the partnership or small business corporation.

(5) Married taxpayers filing a joint federal return who are required to include part of their social security benefits or part of their tier 1 railroad retirement benefits in federal adjusted gross income may split the federal base used in calculation of federal taxable social security benefits or federal taxable tier 1 railroad retirement benefits when they file separate Montana income tax returns. The federal base must be split equally on the Montana return.

(6) A taxpayer receiving retirement disability benefits who has not attained 65 years of age by the end of the tax year and who has retired as permanently and totally disabled may exclude from adjusted gross income up to $100 a week received as wages or payments in lieu of wages for a period during which the employee is absent from work due to the disability. If the adjusted gross income before this exclusion and before application of the two-earner married couple deduction exceeds $15,000, the excess reduces the exclusion by an equal amount. This limitation affects the amount of exclusion, but not the taxpayer's eligibility for the exclusion. If eligible, married individuals shall apply the exclusion separately, but the limitation for income exceeding $15,000 is determined with respect to the spouses on their combined adjusted gross income. For the purpose of this subsection, "permanently and totally disabled" means unable to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment lasting or expected to last at least 12 months.

(7) The adjusted gross income of an individual who contributes to one or more accounts established under the Montana family education savings program must be reduced by the lesser of $3,000 or the amount of the contribution. In the case of married taxpayers, each spouse is entitled to a reduction, not in excess of $3,000, for the spouse's contribution to the accounts. Spouses may jointly elect to treat half of the total contributions made by the spouses as made half by each spouse. The reduction in adjusted gross income under this subsection applies only with respect to contributions to an account of which the taxpayer, the taxpayer's spouse, or the taxpayer's child or stepchild, if the child or stepchild is a Montana resident, is the account owner, as defined in 15-62-103. The provisions of subsection (1)(e) of this section do not apply with respect to withdrawals of contributions that reduced adjusted gross income.

(8) The adjusted gross income of an individual who contributes to a K-12 education savings account established with an account administrator must be reduced by the lesser of $1,000 or the amount of the contribution. In the case of married taxpayers, each spouse is entitled to a reduction, not in excess of $1,000, for the spouse's contribution to the account. Spouses may jointly elect to treat half of the total contributions made by the spouses as made half by each spouse. The reduction in adjusted gross income under this subsection applies only with respect to contributions to an account of which the taxpayer, the taxpayer's spouse, or the taxpayer's child or stepchild, if the child or stepchild is a Montana resident, is the account owner, as defined in 15-62-103. The provisions of subsection (1)(e) of this section do not apply with respect to withdrawals of contributions that reduced adjusted gross income. (Subsection (2)(f) terminates on occurrence of contingency--sec. 3, Ch. 634, L. 1983.)"

Section 6. Section 15-62-103, MCA, is amended to read:

"15-62-103. Definitions. As used in this chapter, the following definitions apply:

(1) "Account" means an individual trust account or savings account established under this chapter.

(2) "Account administrator" means a state or federally chartered bank, savings and loan association, credit union, or trust company.

(3) "Account owner" means the person designated at the time that an account is opened as having the right to withdraw money from the account before the account is disbursed to or for the benefit of the designated beneficiary.

(4) "Board" means the board of regents of higher education established by Article X, section 9, subsection (2), of the Montana constitution and 2-15-1505.

(5) "Committee" means the family education savings program oversight committee established in 20-25-901.

(6) "Designated beneficiary" means, with respect to an account, the person designated at the time that the account is opened as the person whose higher education expenses are expected to be paid from the account or if this person is replaced in accordance with 15-62-202, the individual replacing the former designated beneficiary.

(7) "Financial institution" means any bank, commercial bank, national bank, savings bank, savings and loan association, credit union, insurance company, trust company, mutual fund, or other similar entity that is authorized to do business in this state.

(8) "Higher education institution" means

an eligible educational institution as defined in section 529(e)(5) of the Internal Revenue Code, 26 U.S.C. 529(e)(5), as that section may be amended or renumbered.

(9) "Member of the family" means

a member of the family of the designated beneficiary as defined in section 529(e)(2) of the Internal Revenue Code, 26 U.S.C. 529(e)(2), as that section may be amended or renumbered.

(10) "Nonqualified withdrawal" means a withdrawal from an account that is not:

(a) a qualified withdrawal;

(b) a withdrawal made as the result of the death or disability of the designated beneficiary of an account;

(c) a withdrawal that is made on the account of a scholarship or the allowance or payment described in section 135(d)(1)(B) or (d)(1)(C) of the Internal Revenue Code, 26 U.S.C. 135(d)(1)(B) or (d)(1)(C), and that is received by the designated beneficiary; or

(d) a rollover or change of designated beneficiary.

(11) "Program" means the family education savings program established pursuant to 15-62-201. The program must be structured to permit the long-term accumulation of savings that can be used to finance all or a share of the costs of higher education.

(12) "Qualified higher education expenses" means qualified higher education expenses as defined in section 529(e)(3) of the Internal Revenue Code, 26 U.S.C. 529(e)(3), as that section may be amended or renumbered.

(13) (a) "Qualified K-12 education expenses" means:

(i) fees or tuition for instruction in a public or nonpublic elementary or secondary school, for instruction during the regular school day or school year, including tutoring, class trips, driver's education taken as part of the school curriculum, or summer camps, or for in-grade or age-appropriate curricula that supplement curricula and instruction available during the regular school year and that assist a dependent to improve knowledge of core curriculum areas or to expand knowledge and skills under the accreditation standards and that do not include the teaching of religious tenets, doctrines, or worship for the purpose of instilling the tenets, doctrines, or worship;

(ii) expenses for textbooks, including books and other instructional materials or equipment used in public or nonpublic elementary and secondary schools, in teaching only those subjects legally and commonly taught in public or nonpublic elementary or secondary schools in this state;

(iii) a maximum expense of $400 per family for computer hardware and educational software that assists a dependent to improve knowledge of core curriculum areas or to expand knowledge and skills, purchased for use in the taxpayer's home and not used in trade or business regardless of whether the computer is required by the dependent's school;

(iv) the amount paid to others for transportation of a dependent attending a public or nonpublic elementary or secondary school in this state or in an adjacent state or province, where a resident of this state may legally fulfill the state's compulsory attendance laws;

(v) clothing or uniforms required for physical education classes or choir;

(vi) rental fees or the purchase costs of musical instruments; and

(vii) equipment required for shop, home economics, or art courses.

(b) The term does not include:

(i) tuition for nursery school or prekindergarten classes;

(ii) education expenses after the dependent has left high school;

(iii) instructional books and materials used in the teaching of religious tenets, doctrines, or worship for the purpose of instilling the tenets, doctrines, or worship;

(iv) the cost of driving a dependent to school;

(v) school hot lunches;

(vi) education expenses associated with a home school program; and

(vii) expenses for extracurricular activities, including books or materials for extracurricular activities.

(14) "Qualified withdrawal" means a withdrawal from an account to pay the qualified higher education expenses of the designated beneficiary of the account. The term does not include the withdrawal of a deposit not held in an account for at least 3 years unless the deposit was made before August 1, 1999."

Section 7. Section 15-62-201, MCA, is amended to read:

"15-62-201. Program requirements -- application -- establishment of account -- qualified and nonqualified withdrawal -- penalties. (1) A person who wishes to deposit money into an account to pay the qualified higher education expenses of a designated beneficiary shall:

(a) complete an application on the form prescribed by the board that includes:

(i) the name, address, and social security number or employer identification number of the contributor;

(ii) the name, address, and social security number of the account owner if the account owner is not the contributor;

(iii) the name, address, and social security number of the designated beneficiary;

(iv) the certification relating to no excess contributions adopted by the board pursuant to 20-25-902; and

(v) any other information required by the board;

(b) pay the one-time application fee established by the board;

(c) make the minimum contribution required by the board or by opening an account; and

(d) designate the type of account to be opened if more than one type of account is offered.

(2) A person shall make contributions to an opened account in cash.

(3) (a) An account owner may withdraw all or part of the balance from an account under rules prescribed by the board to enable the board or program manager to determine if a withdrawal is a nonqualified withdrawal or a qualified withdrawal.

(b) The rules may require that:

(i) account owners seeking to make a qualified withdrawal or other withdrawal that is not a nonqualified withdrawal shall provide certifications, copies of bills for qualified higher education expenses, or other supporting material;

(ii) qualified withdrawals from an account be made only by a check payable jointly to the designated beneficiary and a higher education institution; and

(iii) withdrawals not meeting certain requirements be treated as nonqualified withdrawals by the program manager, and if these withdrawals are not nonqualified withdrawals, the account owner shall seek refunds of penalties directly from the board.

(4) If a nonqualified withdrawal is made from an account, an amount equal to 10% of the portion of the proposed withdrawal that would constitute income as determined in accordance with section 529 of the Internal Revenue Code, 26 U.S.C. 529, must be withheld as a penalty and paid to the board for use in operating and marketing the program and for state student financial aid.

(5) The board, by rule, shall increase the percentage of the penalty prescribed in subsection (4) or change the basis of this penalty if the board determines that the amount of the penalty must be increased to constitute a minimum penalty for purposes of qualifying the program as a qualified state tuition program under section 529 of the Internal Revenue Code, 26 U.S.C. 529.

(6) The board may decrease the percentage of the penalty prescribed in subsection (4) if:

(a) the penalty is greater than is required to constitute a minimum penalty for purposes of qualifying the program as a qualified state tuition program under section 529 of the Internal Revenue Code, 26 U.S.C. 529; or

(b) the penalty, when combined with other revenue generated under this chapter, is producing more revenue than is required to cover the costs of operating and marketing the program and to recover any costs not previously recovered.

(7) If an account owner makes a nonqualified withdrawal and a penalty amount is not withheld pursuant to subsection (4) or the amount withheld was less than the amount required to be withheld under that subsection for nonqualified withdrawals, the account owner shall pay:

(a) the unpaid portion of the penalty to the board at the same time that the account owner files a federal and state income tax return for the taxable year of the withdrawal; or

(b) if the account owner does not file a return, the unpaid portion of the penalty on the due date for federal and state income tax returns, including any authorized extensions.

(8) Each account must be maintained separately from each other account under the program.

(9) Separate records and accounting must be maintained for each account for each designated beneficiary.

(10) A contributor to, account owner of, or designated beneficiary of an account may not direct the investment of any contributions to any account or the earnings generated by the account and may not pledge the interest of an account or use an interest in an account as security for a loan.

(11) If the board terminates the authority of a financial institution to hold accounts and accounts must be moved from that financial institution to another financial institution, the board shall select the financial institution and type of investment to which the balance of the account is moved unless the internal revenue service provides guidance stating that allowing the account owner to select among several financial institutions that are then contractors would not cause a plan to cease to be a qualified state tuition plan.

(12) If there is any distribution from an account to any person or for the benefit of any person during a calendar year, the distribution must be reported to the internal revenue service and the account owner or the designated beneficiary to the extent required by federal law.

(13) The financial institution shall provide statements to each account owner at least once each year within 31 days after the 12-month period to which they relate. The statement must identify the contributions made during a preceding 12-month period, the total contributions made through the end of the period, the value of the account as of the end of this period, distributions made during this period, and any other matters that the board requires be reported to the account owner.

(14) Statements and information returns relating to accounts must be prepared and filed to the extent required by federal or state tax law or by administrative rule.

(15) A state or local government or organizations described in section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. 501(c)(3), may, without designating a designated beneficiary, open and become the account owner of an account to fund scholarships for persons whose identity will be determined after an account is opened."

NEW SECTION. Section 8. Repealer. Section 15-62-204, MCA, is repealed.

NEW SECTION. Section 9. Codification instruction. [Sections 1 through 4] are intended to be codified as an integral part of Title 15, chapter 62, part 2, and the provisions of Title 15, chapter 62, part 2, apply to [sections 1 through 4].

NEW SECTION. Section 10. Effective dates. (1) Except as provided in subsection (2), [this act] is effective July 1, 1999.

(2) [ Sections 3 and 4 and this section] are effective on passage and approval.

NEW SECTION. Section 11. Applicability. [This act] applies to tax years beginning after December 31, 1999.

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