According to MGL Chapter 62 § 3, the 529 deduction works as follows
(19) An amount equal to the amount expended in the taxable year for the purchase of an interest in, or the amount contributed in the taxable year to an account in, a prepaid tuition program or college savings program established by the commonwealth or an instrumentality or authority of the commonwealth; provided, however, that in the case of a single person or a married person filing a separate return or as head of household, the total amount deducted in the taxable year shall not exceed $1,000; and provided further, that in the case of a married couple filing a joint return, the total amount deducted in the taxable year shall not exceed $2,000.
Notwithstanding a statute of limitations on the assessment of an income tax under this chapter, a deduction taken under this subparagraph shall be subject to recapture in the taxable years in which a distribution or a refund is made for a reason other than: (i) to pay qualified higher education expenses as defined in 26 U.S.C. 529(e)(3); or (ii) the beneficiary's death, disability or receipt of a scholarship. For the purposes of this subparagraph, ''purchaser'' or ''contributor'' shall mean the person shown as the purchaser or contributor on the records of the qualifying prepaid tuition or college savings program as of December 31 of the taxable year. In the case of a transfer of ownership of a prepaid tuition contract or savings trust account, the transferee shall succeed to the transferor's tax attributes associated with the prepaid tuition contract or savings trust account including, but not limited to, carryover and recapture of a deduction.
Specific to the language of "a deduction taken under this subparagraph shall be subject to recapture", does the taxpayer determine which contributions were deducted or is the deduction assumed to be applied pro-rata across all contributions for the year?
- I make 3 x $500 contributions to a qualified MA 529 plan.
- I take a single $500 non-qualified distribution after doing so.
Can the taxpayer say that the $1000 deduction is related to the $1000 that remains in the account, subjecting themselves to a recapture of $0 or must the $1000 deduction be applied evenly across the $1500 contributed, subjecting the taxpayer to a pro-rated recapture amount of $333?
Follow up: does it matter if the distribution is in the same year as the contribution (a "refund" of contribution) vs in a separate tax year?