Massachusetts 529 Plan Tax Benefit

What Are 529s And How Do They Work

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529 plans are state-operated savings accounts, named after Section 529 of the IRS Code that codified them in 1996. The original 1996 legislation deferred tax on undistributed earnings. The Economic Growth and Tax Relief Reconciliation Act of 2001, signed by George W. Bush, then made earnings growth completely tax-free . The provision became permanent in 2006.

Since the mid-2000s, the growth in 529 plans has been considerable. By the end of 2016, total asset values in 529 plans reached $275 billion. But in the general population, 529 plans are little understood and little used in one survey, 72 percent of respondents did not know what they were.

529 plans have several defining features:

Funds must be used for qualified educational expenditures
No income-eligibility threshold
Waiver from the standard gift expensing rule allows families to superfund accounts
Grandparents are allowed to contribute
Only a small fraction of 529 assets count in making financial aid calculations2
Many states offer income tax deductions for contributions
No residency requirement

A few of these provisions are relatively unusual, so we provide a few more details here.

Qualified educational expenses

Waiver on tax rules for gifts

State-level benefits

Average Cost Of College In Massachusetts

When saving for college in Massachusetts, it’s important to take into consideration the cost of attendance in the state. If you choose to go to an out-of-state school, you need to look at the average cost of attendance in that state.

There are 169 colleges and universities in the State of Massachusetts.

The total average cost of college in Massachusetts for in-state residents is $26,390 for 2022. This includes tuition, room and board, books and supplies, and other expenses.

For just tuition alone, the average undergraduate tuition for in-state residents is $9,872 for 2022. The cost of tuition in Massachusetts has been rising at about 6% per year.

Explore the data here.

Qualified Higher Education Expenses

These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.

The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.

Tuition and fees.

Books, supplies, and equipment.

Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.

Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it isnt more than the greater of the following two amounts.

The allowance for room and board, as determined by the school, that was included in the cost of attendance for a particular academic period and living arrangement of the student.

The actual amount charged if the student is residing in housing owned or operated by the school.

You may need to contact the eligible educational institution for qualified room and board costs.

The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if its to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school.

How Do Financial Aid And Scholarships Affect A Massachusetts 529 Plan

A 529 plan can affect financial aid, but the impact is dependent on the account owner and their tax situation, not the beneficiary.

If the account is held by the parent or guardian of the student, funds within are considered parental assets. The Expected Family Contribution calculation for parent assets is a maximum of only 5.64% versus 20% for the students assets.However, if the 529 plan is held by a grandparent or extended family member, while the assets are not taken into account for the FAFSA EFC, distributions from these accounts qualify as student income, which is assessed at 50%.

529 accounts do not affect merit-based scholarships. Other scholarships may depend based on the school.

You can find more information about financial aid and saving for college costs at savingforcollege.com or on the website of the Massachusetts Educational Financing Authority at mefa.org.

S: A Handout To The Upper Middle Class

Who reaps the benefits of these tax breaks? The main beneficiaries are upper-middle-class families. The Government Accountability Office found that in 2010, 47 percent of families with 529 plans had an annual income of over $150,000. 4 The tax benefits associated with 529 plans also skew towards higher-income families, according to the GAO. The median tax savings for families making up to $100,000 was $561, compared to $1,958 for families making between $100,001 and $150,000, and $3,132 for families with incomes over $150,000.

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Plan Grant For Massachusetts Residents

Beginning January 1, 2020, all babies born in Massachusetts or adopted by Massachusetts residents are eligible for a $50 seed contribution to a MEFA U. Fund account. Families must enroll in Massachusettss BabySteps Saving Plan before the beneficiarys first birthday or within one year of adoption to qualify.

How To Incorporate Potential Tax Benefits When Deciding Which Plan To Choose

Fifteen states do not offer state-specific tax incentives, either because it’s a state with no income tax or a state that doesn’t offer any tax benefits on 529 contributions. These investors, along with those who reside in tax-parity states, have the flexibility to shop around, as they can invest in any plan without forfeiting tax benefits. Morningstar Analyst Ratings can point these investors to the best options. Currently, 14 plans receive an Analyst Rating of Gold or Silver, listed in Exhibit 4. Subscribers to Morningstar.com can access our 529 plan reports from the 529 Plan Center map. .

For those who reside in states with specific tax benefits, the exhibits below provide factors and data points to consider when selecting a plan. First, we list the Analyst Rating for the lowest-cost direct-sold plan and the average fees for the plan’s cheapest age-based or target-date enrollment series, typically the default choice for most 529 plan users. We then return to our couple earning $100,000. The dollar value from a $3,000 contribution is listed in the second and third exhibits above. In the tables below, we calculate the maximum tax benefit by contributing at the state’s limit, per year, per beneficiary. These calculations, along with the state’s tax deduction or tax credit basis , can help families estimate the potential tax savings for their situation .

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Your 529 Plan In 2019

The IRS doesn’t set specific annual contribution limits to 529 plans for 2019. But because these contributions are considered gifts, the $15,000 per-person annual exclusion and $11.4 million lifetime exclusion mean that most taxpayers will never reach these limits. As a result, your contributions are tax-free. The allowance up to $10,000 for K-12 education still stands as it did for 2018.

If you use the money you withdrew for anything other than educational expenses, Massachusetts will take the deduction back for the tax year. Exceptions to this deduction recapture are, if the beneficiary dies, becomes disabled or receives a scholarship.

These deductions may be limited if the difference between what you withdrew, minus any scholarships, grants or financial aid, is more than 25 percent of your adjusted gross income as defined by Massachusetts state tax authorities. Check with your professional tax adviser to find out if this could apply to you before you withdraw the money.

Ufund College Investing Plan

How families can use 529 plans to help save for college

Fee Score

Performance

Massachusetts’ U.Fund College Investing Plan, a Fidelity-managed 529 plan follows the same approach as other Fidelity plans in Arizona, Connecticut, Delaware and New Hampshire. It features three age-based options one using Fidelity Series actively managed funds one using Fidelity Series index funds and a third using a combination of the two. The plan also offers 11 static options, and an option that invests in an interest-bearing deposit account.

Fee Score

Performance

Massachusetts Educational Financing Authority

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Plan State Income Tax Benefits

Many states offer incentives to encourage residents to save for college. Studies show that children who have even a small amount saved for college are more likely to attend and graduate. Having a highly educated workforce can help drive economic growth and development in the state.

More than two-thirds of the states offer an income tax benefit for college savings. The majority of states require taxpayers to contribute to their home states 529 plan to qualify for an income tax benefit, but seven states offer a tax incentive for contributions to any 529 plan:

The most common benefit offered is a state income tax deduction for 529 plan contributions. However, Indiana, Utah and Vermont offer a state income tax credit for 529 plan contributions and Minnesota offers a state income tax deduction or tax credit, depending on the taxpayers adjusted gross income.

Tax Benefits For Nebraskans

Account owners are eligible to receive a Nebraska state income tax deduction of up to $10,000 for contributions made to their own Bloomwell 529 account.2 Contributions made beyond the $10,000 mark cannot be carried over to a future year.

For minor-owned or UGMA/UTMA Bloomwell accounts, the minor is considered the account owner for Nebraska state income tax deductions. The minor must file a Nebraska tax return for the year their contributions are made to be eligible for a tax deduction for their contributions. In the case of a UGMA/UTMA Bloomwell account, contributions from the parent/guardian listed as the Custodian on the UGMA/UTMA Bloomwell account are also eligible for a Nebraska state tax deduction.

Both the contribution and earnings portion of funds that were rolled over into a Bloomwell account from a non-Nebraska 529 plan are eligible for the tax deduction.

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Tax Benefits For Each State

In some states, contributions to any states 529 plan are eligible for a state income tax deduction . Other states have no state income tax or no tax deduction for 529 contributions and would be considered tax neutral states. And, other states provide tax benefits when contributing to the home state plan and should be reviewed to see if the low cost, quality investments, and overall Bloomwell 529 structure offset these other benefits .

With the Bloomwell 529 plan, Nebraska taxpayers can deduct up to $10,000 in contributions from their taxable income each year .2

Before investing, investors should consider whether their or their beneficiarys home state offers any state tax or other state benefits such as scholarship funds, financial aid, and protection from creditors that are only available for investments in such states qualified tuition program. Investors should also consult their tax advisor, attorney, or other advisor regarding their specific legal, investment, or tax situation.

Tax-Parity States include: Arizona, Montana, Minnesota, Kansas City, Missouri, Pennsylvania, and Florida

States that offer tax benefits for contributions to any states 529 plan.

States where tax benefits are only available for those who pay income tax in that state and own that states 529 plan.

Tax-Neutral States include: Alaska, California, Nevada, Washington, Wyoming, South Dakota, Texas, Hawaii, Tennessee, Kentucky, North Carolina, Delaware, New Jersey, New Hampshire, Maine

Coordination With Coverdell Education Savings Account Distributions

If a designated beneficiary receives distributions from both a qualified tuition program and a Coverdell Education Savings Account in the same year and the total of these distributions is more than the Beneficiarys adjusted qualified higher education expenses, the expenses must be allocated between the distributions.

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Plan Contributions For K

The Tax Cuts and Jobs Act of 2017 expanded the definition of 529 plan qualified expenses to include up to $10,000 in K-12 tuition per year, per beneficiary. However, some states have not conformed with the federal law and consider K-12 tuition a non-qualified 529 plan expense. Families in non-conforming states who use 529 plan funds to pay for K-12 tuition may be subject to state income tax on the earnings portion of the non-qualified distribution, and state income tax benefits may be subject to recapture.

Massachusetts 529 Tax Benefits

When you file your Massachusetts state tax return, you can claim a deduction for your contributions to a 529 plan. However, the Massachusetts 529 plan tax deduction is limited to $1,000 if you file as single or head of household, or $2,000 if you and your spouse file a joint income tax return.

In addition, the 529 plan or any other pre-paid tuition program or a college savings program to which you contribute must be sponsored by the state of Massachusetts or under its authority to qualify for the deduction.

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North Dakota Tax Deductions

The standard 5 year deductible for one large lump sum payment applies to the North Dakota 529 program. North Dakotas 529 also allows the use of 529 assets to pay for k-12 tuition without being subject to recapture.

$5,000 deduction for single filers.
$10,000 deduction for couples filing jointly.
The tax deduction is available only if the contributor is a resident and contributing into an in-state 529 account.
North Dakotas maximum account balance for 529 plans is $269,000.

For more information on North Dakota 529 plans,

Who Really Benefits From 529s: Parents Or Colleges

How to Pay Less Taxes in 2018: Tax Loss Harvesting, 529 Plans, and 401k Contributions

A common defense of 529 tax advantages is that college is becoming an expensive proposition, even for relatively affluent families. As the liberal economist Jared Bernstein reflected on the 2015 reversal of the 529 reforms: following that experience, and from the debate over free, or debt-free, college in the presidential campaigns, Ive come to see the problem of college affordability as one that climbs very high up the income scale.14

There is no denying that the price of a college education has increased, outpacing inflation for the past ten years. But rather than being the solution, regressive government subsidies could be part of the problem. Three main theories have been posited to explain rising prices:

The minimum threshold for the top quintile of household income in 2015 was $112,262. For more detail see .

The 95th percentile of the income distribution in 2015.

The $15,000 in household income would result in a capital gains rate 15 percent rate applied to the $214,319 of the investment growth.

Note that these estimates have been generated by collecting reported figures from the most recent state-level expenditure reports . Some states, like Colorado, rely on models to estimate the magnitude of specific tax spending provisions in their state expenditure reports.

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Tax Benefits Of The 529 Plan

Massachusetts taxpayers who open an account with the MEFA U.Fund College Investing Plan can deduct contributions up to $1,000 or $2,000 from their state taxable income per account each year.

But because its a 529 college savings plan established under Section 529 of the Internal Revenue Code, all account holders enjoy some tax benefits. When you invest in the plan, your money grows tax-exempt as long as its invested. Your withdrawals are also tax-free when you use them on qualified higher education expenses.

But a word of caution here. The government could penalize you for not using these savings accounts as they were intended. You can take money out the plan at any time. But if you use the funds on anything other than a qualified higher education expense, youve made a nonqualified withdrawal. This withdrawal may be subject to federal income tax and a 10% penalty. You may also be also required to repay previously claimed tax deductions.

Find a financial advisor or qualified tax professional to discuss how any type of nonqualified withdrawal may affect you based on your individual situation. In addition, you should ask your advisor about any specific tax advantages that you may be able to take advantage of based on your unique financial situation.

Get Smart About Savings

Your Bloomwell 529 contributions are made with after-tax dollars and any earnings grow federally and state tax-deferred while invested. That means your earnings grow tax-free while theyre in the Plan extra growth you can use for education expenses.

When youre ready to use those funds, withdrawals for qualified education expenses can be made tax-free.1

What you contribute and any earnings grow on a tax-deferred basis with no current taxes each year while invested in the Plan.
When you withdraw money for qualified education expenses, the withdrawal is free from federal and state taxes.
The Plan has a $500,000 contribution limit for each beneficiary.

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The Massachusetts 529 College Savings Plan

MEFA’s U.Fund allows you to save for your child’s education in a flexible, tax-advantaged account. You can use your savings to pay for qualified education expenses at any eligible institution in the country. There’s no minimum to open an account, and you can set up a gifting page so that others can contribute.

Massachusetts College Costs & Trends

Colleges and universities across the United States experienced increased operating costs of 2.5% in 2019. This most recent inflation figure was down slightly from the 2.9 percent increase in 2018 and 3.4 percent increase in 2017. These costs are forwarded directly to students in the form of higher tuition and living expenses. As these costs steadily rise every year, parents are looking for ways to help offset these future higher education costs.

These rising costs are hitting closer to home in Massachusetts as well. Massachusetts’s higher education costs rose by 38% in just the last 10 years, ranking as the 24th highest state.

The table below shows the average one-year costs last year for different types of Massachusetts colleges and universities.

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