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California 529 Plans Tax Benefit

Who Is Eligible For A 529 Plan State Income Tax Benefit

Tax changes to your 529 plan

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.

California State Specific 529 Plan Scholarshare

California offers the Californias ScholarShare College Savings Plan . It offers a variety of investment options from TIAA-CREF, T. Rowe Price, and others.

This is a strong state plan due to its low fees at only 0% 0.53% and high maximum contribution at $529,000. It offers a variety of investment opportunities, including age-based portfolios and static investments. Both options include different investment options based on your needs.

TIAA-CREF Tuition Financing, Inc. serves as the Program Manager and Program Distributor. The ScholarShare Investment Board , chaired by the State Treasurer, is state agency of record.

What Are My Investment Options How Do I Select A Portfolio

ScholarShare 529 offers a variety of smart investment options to fit your life situation, risk tolerance and savings goals. These portfolios vary in investment strategy and degree of risk, allowing you to select a portfolio or combination of portfolios that fit your needs and savings goals.

To compare our ScholarShare 529 investment portfolios, visit our Investment Comparison page. For more information on the investment objectives, risks, charges and expenses, read the Plan Description.

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College Savings Plan Benefits And Features

Are 529 plan contributions tax deductible? Contributions are made with after-tax dollars. More than 30 states offer a full or partial tax deduction or credit for 529 plan contributions.
Are there other tax benefits to 529 plans? Earnings grow on a tax-deferred basis, and you dont pay federal taxes on 529 plan withdrawals when the money is used for qualified educational expenses.
What are 529 plan qualified education expenses? Tuition, fees, books, computers and related equipment, supplies, special needs, room and board for half-time students, and up to $10,000 in tuition expenses at private, public, and religious K-12 schools .
Who controls the 529 savings plan account? The account owner, until the funds are withdrawn.
Can I change 529 beneficiaries? Yes, to another child or grandchildeven for yourself if youre going back to school.
Can 529 plans be used for education loans? You can withdraw up to $10,000 from a 529 plan to pay principal and interest on a qualified student loan for a 529 beneficiary.
Do 529 plans affect financial aid? Maybe it depends who owns the account. For example, if a parent is the account owner, up to 5.64% of the plan is assessed as a parental asset.

Tip: What if your child doesnt go to college, or doesnt need all the funds youve saved? You may have options but need to talk to your tax advisor about the implications, DeHaan says. Not all is lost.

Withdrawals And Interest Aren’t Taxed

ecvisiondesign: California 529

California does afford a small tax break for 529 plans. Funds that are withdrawn to pay for qualified educational expenses won’t be taxed as income. That also applies to earnings on the contributions. So if a grandparent contributed $50,000 to a 529 and it earned $10,000 in interest, you can take out $60,000 for qualified college expenses for your child without counting it as income.

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How Do I Know Which Educational Institutions Are Eligible

Your ScholarShare 529 account can be used at eligible colleges, universities, vocational schools, community colleges, graduate or postgraduate programs, apprenticeships and more.1 Contact your school to determine whether it qualifies as an eligible educational institution or use the Federal School Code Search tool on the Free Application for Federal Student Aid website.

Footnotes

  • 1Withdrawals for registered apprenticeship programs can be withdrawn free from federal and California income tax. If you are not a California taxpayer, these withdrawals may include recapture of tax deduction, state income tax as well as penalties. You should talk to a qualified professional about how tax provisions affect your circumstances.Apprenticeship programs must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.
  • 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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    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.

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    Plan Benefits: They Grow Tax

    What to Know: Californians Soon to Begin Receiving Middle Class Tax Refunds

    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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    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:

    Donating household goods to your favorite charity? Learn the ins and outs of deducting noncash charitable contributions on your taxes with the experts at H& R Block.

    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.

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    Does The Texas 529 Plan Offer Special Tax Advantages To Its Residents

    A 529 plan is a savings program to help parents and others save money for students to use to pay for college. It’s named for the section of the Internal Revenue Service code that set up such plans, but 529 plans are created and operated by states. Plans differ by state, but in general, contributions are pooled and invested to earn income tax-free until the funds are withdrawn for college. California, like most states, offers many benefits to the owners of 529 plans.

    What Is A 529 Plan

    California ScholarShare 529 launches to help families save for college ...

    A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to postsecondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.

    The two major types of 529 plans are education savings plans and prepaid tuition plans.

    Education savings plans grow tax-deferred, and withdrawals are tax-free if theyre used for qualified education expenses. Prepaid tuition plans allow the account owner to pay current tuition rates for future attendance at designated colleges and universities. That means that, most likely, you can lock in a lower cost of college attendance.

    529 plans are also referred to as qualified tuition programs and Section 529 plans.

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    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.

    How 529 Plan State Income Tax Benefits Work

    State income tax benefits are based on the amount of a taxpayers total 529 plan contributions in a given tax year. While there are no annual contribution limits for 529 plans, most states limit the total amount of contributions that qualify for an income tax credit or deduction.

    For example, New York residents are eligible for an annual state income tax deduction for 529 plan contributions up to $5,000 . In Colorado, New Mexico, South Carolina, and West Virginia, 529 plan contributions are fully deductible in computing state income tax.

    For most taxpayers, there is no requirement to hold funds in a 529 plan for a specified amount of time before claiming a state income tax benefit.

    Taxpayers can contribute to a 529 plan, immediately tax a qualified distribution to pay for college or K-12 tuition, and qualify for the state income tax benefit. However, Montana and Wisconsin block this state tax deduction loophole by imposing time limits, and Michigan and Minnesota base state income tax benefit on annual contributions net of distributions.

    Parents saving for K-12 tuition and adults using a 529 plan to pay for graduate school may get the equivalent of an annual discount on tuition by funneling payments through a 529 plan and claiming a state income tax benefit each year.

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    How To Open A 529 Plan

    The first step to opening a 529 plan is choosing one. Start by reviewing your states plan, since it may offer added tax benefits to residents. You should also compare 529 plans from other states and review factors such as performance and fees.

    Next, youll need to select a beneficiary. Naming your child or grandchild as beneficiary is common, but youre not bound by who youre related to. Almost anyone can be named beneficiary of the accounteven yourself.

    You can apply and open a 529 plan online via the plans website or through a broker. Youll need to provide personal details about yourself and the beneficiary, including your Social Security number , date of birth and contact information.

    The last step is to fund the plan and select your desired investment portfolio. You should be able to easily transfer money directly from an outside account. You might also consider setting up automatic transfers so you can consistently add to the account each month.

    When youre ready to select your portfolio, see what the plan offers. Many people opt for age-based portfolios, which automatically adjust the asset allocation of the account as the child ages. The closer the child gets to college-age, the more conservative the investments become. You can change the investment strategy later if you choose.

    Plan Rules And Contribution Limits

    New Tax Law Update: 529 Plan Expansion

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    The price of higher education doesn’t come cheap, which means it’s a good idea to start saving while your kid is learning their ABCs not while they’re studying for their SATs.

    For most people, the choice of college savings vehicle is easy: 529 plans offer some great incentives for saving.

    A 529 plan provides tax-free investment growth and withdrawals for qualified education expenses. Parents who start saving in a 529 account when their children are young can take advantage of those tax savings, as well as compounded returns and in some states a tax deduction on contributions.

    But 529 plans also come with some complicated rules, particularly around distributions. Here’s what you need to know.

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    What If I Don’t Use My 529 Plan

    You can transfer your 529 account to another child, your grandchild or for your own qualified educational needs if your child winds up getting large grants or scholarships or doesn’t go to college. You can also roll over the funds to another family member’s ABLE account, which won’t incur any penalties. This type of account is for individuals who are disabled before turning 26 years old and receive social security insurance benefits.

    Another option if you don’t use the cash in your 529 plan is to withdraw the funds, though you’ll have to pay income taxes on that amount plus a 10% penalty on earnings.

    Plan Contribution Limits Rise To $17000 In 2023

    For those who want to stash as much away for college as they possibly can, its worth noting that the annual gift tax exclusion is increasing to $17,000 in 2023. According to IRS.gov, this new amount is up $1,000 from the $16,000 gift tax exclusion in 2022, and up from the $15,000 gift tax exclusion amount that was in place from 2018 to 2021.

    Kantrowitz notes that this means a couple can give twice this amount jointly in 2023, or $34,000, since there are two individuals doing the giving.

    If you use five-year gift-tax averaging, you can contribute five times as much as a lump sum, or $85,000 as an individual or $170,000 as a couple, he said.

    Thats quite a bit of money in contributions, and the annual limit is likely a lot more than youll need to save in a year if you start stashing away money for college when your children are young.

    Kantrowitz points out that, if you give $17,000 per year for 17 years from birth to college at the beginning of each year and earn a 6% average return on investment, you will accumulate a total of $508,396.09.

    If you break it up into monthly contributions of $1,416.67, you will accumulate a total of $495,094.85, he says.

    Unless you think your child is going to pursue multiple graduate degrees or attend an Ivy League School without any financial aid, you can start saving a lot less than that early on and have plenty to pay for school.

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