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529 Plan Tax Benefits By State

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2 Account owners may deduct for Nebraska income tax purposes contributions they make to their own account up to an overall maximum of $10,000 . Contributions in excess of $10,000 cannot be carried over to a future year. For a minor-owned or UGMA/UTMA 529 account, the minor is considered the account owner for Nebraska state income tax deduction purposes. The minor must file a Nebraska tax return for the year their contributions are made to be eligible for a tax deduction for their own contributions. In the case of a UGMA/UTMA 529 account, contributions by the parent/ guardian listed as the Custodian on the UGMA/UTMA Plan account are also eligible for a Nebraska state tax deduction. back

3 A donor may elect to treat a contribution to a beneficiarys account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiarys account of up to $80,000 without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donors death will be includible in the donors estate for federal estate tax purposes. back

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States With No Tax Savings

Some states have no deduction or credit for 529 plan contributions. If you are a resident of one of these states, there are still plenty of 529 plan options but no tax breaks for utilizing them.

If you live in one of these states, your best option is to choose a state plan that has low fees and offers the type of investment options you want. In most cases, you do not need to be a resident of a state to invest in its plan.

Are 529 Contributions Tax Deductible

Never are 529 contributions tax deductible on the federal level. However, some states may consider 529 contributions tax deductible. Check with your 529 plan or your state to find out if youre eligible.

A 529 plan allows you to save for college or higher education while receiving some type of tax benefit. Earnings from 529 plans are not subject to federal tax and generally not subject to state tax when used for qualified education expenses such as tuition, fees, books, as well as room and board. The contributions made to the 529 plan, however, are not deductible.

For more information about 529 Contributions, visit:

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What Happens If My Child Doesnt Go To College

The future is always uncertain, and some parents worry about losing the funds they saved in a 529 plan if their child doesnt go to college or gets a scholarship. Generally, you will pay income tax and a penalty on the earnings portion of a non-qualified withdrawal, but there are some exceptions. The penalty is waived if:

  • The account beneficiary receives a tax-free scholarship
  • The account beneficiary attends a U.S. Military Academy
  • The account beneficiary dies or becomes disabled

However, the earnings portion of the withdrawal will be subject to federal income tax, and sometimes state income tax. The biggest misconception about a 529 plan is that you can never use your funds again, which is simply not true. Also, the taxes and penalties will only be on the portion that you earn in the 529 accounts, not the contributions.

How 529 Plan Tax Breaks Work

529 Tax Guide

529 plan contributions are made with after-tax dollars. That means they don’t qualify for a tax deduction on your federal income taxes.

But DC and 36 states do offer some form of tax relief on state taxes for those contributing to plans. The exact nature of the tax benefits varies.

Some states offer tax credits, while others offer a deduction up to a flat, maximum figure or limit the deduction based on your income.

Whether you are filing as an individual taxpayer or filing jointly also affects the size of your deduction in many states.

Here’s a full list of the states offering 529 plan contributions or tax deductions or benefits as of 2022.

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Can I Use A 529 Plan To Pay For Rent

Yes, room and board is considered a qualified expense if the student is enrolled at least half-time, which most colleges and universities consider to be at least six credit hours per term.

For on-campus residents, qualified room-and-board expenses cannot exceed the amount charged by the college for room and board. For students living off-campus, qualified room and board expenses are limited to the cost of attendance figures provided by the college. Contact your financial aid office for more information.

Limits On Annual 529 State Income Tax Benefits

Most states limit the amount of annual 529 plan contributions eligible for a state income tax benefit, but annual 529 plan contributions are fully deductible in:

In some states, the amount of 529 plan contributions eligible for an income tax benefit is per beneficiary, but in other states the amount is per taxpayer. If the state income tax benefit is offered per beneficiary, parents with multiple children should consider opening a 529 plan for each child to maximize the potential state tax savings.

For example:

  • Nebraska offers married taxpayers a state tax deduction for 529 plan contributions to a 529 plan of up to $10,000 per year
  • Ohio offers married taxpayers a state tax deduction for 529 plan contributions of up to $4,000 per year for each beneficiary

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Who Is Eligible For A 529 Plan State Income Tax Benefit

States typically offer state income tax benefits to any taxpayer who contributes to a 529 plan, including grandparents or other loved ones who give the gift of college. However, in 10 states only the 529 plan account owner may claim a state income tax benefit.

Eligible taxpayers may continue to claim a 529 plan state income tax benefit each year they contribute to a 529 plan, regardless of the beneficiarys age. There are no time limits imposed on 529 plan accounts, so families may continue to make contributions throughout the childs elementary school, middle school, high school, college years, and beyond.

State income tax benefits should not be the only consideration when choosing a 529 plan. Attributes such as fees and performance must always be taken into account before you enroll in a 529 plan. In some cases, better investment performance of another states 529 plan can outweigh the benefits of a state income tax deduction.

Avoid Issues With 529 Plan Withdrawal Timing

Tax changes to your 529 plan

The account owner gets to decide when to withdraw funds from a 529 plan. Some plans have a waiting period before you can take a distribution. For instance, you cant make a contribution on day one and then take a distribution on day two.

A logical assumption is that a 529 distribution must be requested when the college bill is received and then used to pay the balance due. In reality, a distribution can be taken at any time during the year, and it is tax-free as long as an amount equal to or greater than the qualifying expenses are paid during the year. In other words, the distribution doesnt have to be traceable to the actual payment of expenses.

A problem occurs when you withdraw money from a 529 plan this year, and wait until next year before making the tuition payment or, if you paid the expenses last year with a personal check and you reimburse yourself this year by taking a 529 plan withdrawal. By spanning two tax years, you are risking a mismatch that can result in tax and penalties.

The risk of a mismatch is especially high when the second semester tuition bills arrive in December but arent payable until January.

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How To Open And Contribute To A 529 Plan

Parents, grandparents and other family members can open a 529 account on behalf of a child or adult at a brokerage or other financial institution, or directly with a state. A person can be the beneficiary of more than one 529 plan at the same time, but youll want to make sure the combined contributions dont exceed the states contribution limit.

Most 529 college savings plans allow you to open an account with a small amountsay $25 or $50 a monthif you sign up for an automatic investing plan, with the 529 contributions coming directly from your bank or brokerage account.

Also, be sure to ask whether your employer allows you to make 529 contributions automatically as a payroll deduction, which is a benefit some companies offer.

Get A State Income Tax Deduction

If you’re a New York State taxpayer and an account owner, you may be able to deduct up to $5,000 of your Direct Plan contributions when you file your state income taxes. Please consult your tax advisor. **

You must make a contribution before the end of a given calendar year for it to be deductible for that calendar year. If you send your contribution by U.S. mail and it’s postmarked on or before December 31, we’ll treat your contribution as having been made in the year in which it was sent.

To learn more about depositing your tax refund directly to your NY529 Direct Plan account, see here.

Note: There are no federal tax deductions for contributions to 529 plans.

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Using Proceeds From The Account

Proceeds from your account can be used to pay tuition and other qualified higher education expenses of your beneficiary at any eligible undergraduate or graduate public or private college or university or trade, vocational, or professional school.

Qualified higher education expenses include:

  • Equipment required for enrollment or attendance at any eligible post-secondary school in the world

Enjoy A Federal Gift Tax Incentive

The Tax Benefits of 529 Plans

You can contribute up to $16,000 per year without triggering federal gift taxes. Or you can choose a special election that allows you to treat a single $80,000 contribution as if it were made over a five-year period.***

Gifts in excess of these amounts may be subject to federal gift taxes. For more information, consult a qualified tax advisor.

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Watch Your Earnings Build

Your NEST contributions are made with after-tax dollars and earnings grow federally and state tax-deferred while invested. So you dont have to pay taxes on the money youre earning while its in the Plan. Any investment growth is yours to use for college expenses.

When its time to use those funds for school, withdrawals can be tax-free if the funds are used for qualified college expenses like tuition, books, and equipment.1

  • There is a $500,000 contribution limit for each beneficiary.
  • Nebraska account owners receive tax advantages for investing in NEST, including up to an annual $10,000 state income tax deduction.2
  • Account owners can receive 529 plan tax advantages regardless of where they live.

Plan Tax Benefit And Advantages

Regardless of how much you invest, these tax advantages help you maximize your college savings:

  • Tax-Deferred Growth Contributions grow free of federal and state income taxes while in the account.
  • Tax-Free 529 Withdrawals No income tax is paid on the growth of your account when withdrawals are used for qualified expenses.
  • State Tax Deduction Deduct your contributions from your taxable income. Check with your state for specific tax benefits. For example, Kansas taxpayers receive an annual adjusted gross income deduction of up to $3,000 for contributions per child. The availability of tax or other state benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.
  • Estate Planning & Accelerated Gifting Reduce your personal taxable estate through accelerated gifting . This means you can make five years worth of gifts up to $80,000 to your 529 account in a single year without being subject to gift taxes. This benefit is unique to 529 plans.

The difference between tax-free growth and taxable growth can be significant. Using these tax benefits means you are putting your money to work for you!

The availability of tax or other state benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.

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Tax Benefits When Contributing To Another State’s 529 Plan

In most cases, you need to contribute to your own state’s 529 plan that is, the one where you live and pay income taxes to receive the state tax benefits.

However, there are seven states that offer “tax parity” on your contributions. This means that you’ll receive the same tax benefit when contributing to any 529 college savings account even if it’s sponsored by another state.

Although you can receive state tax benefits in these seven states when contributing to another state’s 529 plan, some states offer incentives to use their plan instead. For example:

  • Arkansas offers a larger deduction for those investing in the homegrown 529 Gift program up to $10,000 , vs just $6,000 if you invest “abroad.”
  • Pennsylvania 529 accounts are exempt from state inheritance taxes, are not counted for state college financial aid calculations, and are protected from state-based creditors.

What Is A 529 Plan

Here’s how to make the most of 529 plans

A 529 plan is a tax-advantaged investment account that can be used to pay for qualified education costs. You can open a 529 plan at any time and name nearly anyone as a beneficiaryâincluding yourself. The beneficiary can use the money to pay for school upon reaching adulthood. Anyone can contribute to a 529 plan, including extended family or friends.

Also known as qualified tuition plans, 529 plans are commonly sponsored by statesâWyoming is the only state without one. While a handful of states require you to be a resident to use their 529 plans, most do not. However, you may receive extra benefits in your home stateâs plan, so itâs wise to compare your options nationally before opening an account.

Find your stateâs 529 plan here.

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Earn Federal Tax Breaks

Your earnings from your 529 investments are always tax-free at the federal level if you use the money for qualified expenses. If you use the money for noneducation costs, you may pay income tax and a 10% penalty on the amount of earnings you withdraw.

Account owners may also make contributions to a 529 plan to avoid gift taxes. Typically, a gift tax would apply if you give someone more than $16,000 for the 2022 tax year. However, itâs possible to contribute more than this to a 529 plan and still avoid taxes.

Account owners can contribute up to five times the gift tax maximum in one lump sumâthat would total $80,000 for the 2022 gift tax rules . You will need to file additional paperwork at tax time to correctly distribute this amount over five years, but frontloading your investments in this way could help you earn larger returns more quickly. This process can also be repeated when the five-year period ends.

What Happens To Money Saved If My Child Doesnt Use It For College

Money in 529 plans must be used to pay for qualified education expenses, which gives you less flexibility than if youd saved in a brokerage account or savings account. You can always take the money out to pay for expenses other than education, but youll pay federal income tax and a 10% penalty to do so.

You have other options, however, if your child doesnt go to college or gets a scholarship that covers their expenses. For example:

  • Your child can use the money for a registered apprenticeship program instead
  • You can transfer the money to another beneficiary who is a qualifying family memberincluding yourselfto use for education expenses
  • In the event your child receives a full scholarship, you can withdraw money from the account for non-education expenses and pay only federal income tax
  • Up to $10,000 in 529 plans can be used to pay off existing student loans, so you may transfer the money to a beneficiary who can use the money to pay off debt. Money in the account also can be used to repay beneficiaries siblings student loan debt, up to ,000 per sibling
  • Up to $10,000 in 529 plans can also be used to pay tuition at K-12 schools

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How Does A 529 Plan Work

A 529 plan works similarly to a retirement plan. Youâll set aside money on a regular basis and invest it according to your risk tolerance, or your childâs age if you choose an age-based portfolio.

Money saved in a 529 plan grows tax-free and wonât be taxed upon withdrawal as long as you use it for qualified education expenses. Eligible expenses include college tuition, room and board, textbooks, computers and software for students attending half-time or more, and up to $10,000 in K-12 private school tuition. Individual states run their own 529 plans, but you can choose to participate in any stateâs plan. You may get a tax credit or deduction for using your home stateâs plan, so it makes sense to compare various accountsâ benefits.

Plan Benefits: They Grow Tax

When It Comes to 529s, How Good Is Your State

Earnings on 529 accounts are not treated as taxable income. Lets say, for example, that you save $1,000 in a 529 investment account, which grows by 5% in a year to $1,050. That $50 in growth isnt taxable.

Plus, if you sold those 529 account investments to pay for your childs college, you wouldnt face federal income tax on the sale proceeds or account withdrawals as long as you use those funds to pay for qualified education-related expenses. But if you use 529 funds for nonqualified expenses, the earnings could be taxed as income. Other penalties might apply too.

The rules for spending 529 funds allow you to use the money for everything from tuition to paying for a students internet access. The Secure Act, which became law in 2019, further relaxed rules on how you use money in a 529 plan. It allows beneficiaries of 529 funds to use leftover money to repay up to $10,000 of their student loans. The law also lets borrowers apply money from their 529 plan to pay for home schooling expenses and apprenticeships as well as private primary and secondary education.

No matter the expenses that the 529 money goes toward, growing college funds in a 529 savings account without adding to your tax burden is a significant tax benefit.

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