I'm a little confused as to how recapture works for 529 plans in Illinois (particularly with respect to playing for private school and possible changes in the state tax code.) Or rather, I want to check that I am understanding it correctly.

Let's suppose that I contribute $10,000 in 2020. With the current Illinois income tax of 5% (well, really 4.95% but let's use round numbers), there would be a $500 state tax deduction. Assume that in 2025 few years later the fund is worth $20,000 (round numbers for illustrative purposes only!)

Now suppose in 2025 I start withdrawing $10,000 per year for private school tuition. This is a federally qualified expense, so there are no federal tax issues. However, I believe that in Illinois this is not a qualified expense and so subject to recapture.

Is the following analysis correct?

  1. Assuming the Illinois tax rate remains flat at 5%, these $10,000 withdrawals in 2025 and 2026 will be subjected to $500 per year in taxes in both 2025 and 2026.

  2. Assuming the Illinois tax rate changes to a flat rate of 7%, these $10,000 withdrawals will both be viewed as $5000 initial payment + $5000 income, so the first $5000 will be subject to $250 recapture on taxes previously not paid and then second $5000 will be subjected to the 7% of $5000 = $350 in taxes, so I would pay $600 per year in 2025 and 2026.

I'm not at all sure about the second point --- perhaps the entire amount would be taxable at 7%, or perhaps it depends on the exact details of changes to the Illinois tax code if they occur. So I would still be happy if someone can either correct any misconceptions in the first point or confirm that it is correct.


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