As colleges welcome students back for the fall, many parents can attest that paying for higher education is a challenge.
Fortunately, both federal and state governments offer tax breaks to families who save for college, using what are known as 529 savings plans. The plans are named after Section 529 of the Internal Revenue Code and are sponsored by state agencies.
Every state has one or more 529 plans, offering various mutual-fund-like investments, and any family can invest in any one of the more than 100 state plans.
So what do these plans offer that you wouldn’t get with regular mutual funds?
Money-saving tax advantages:
• While you can’t deduct your contributions on your federal taxes, the earnings can be withdrawn tax free if used for eligible college expenses. These include tuition, and room and board.
• Many states do allow you to deduct your contributions or receive a credit on your state taxes, if you contribute to that state’s plan. If you’re a New York resident, for example, you can deduct up to $5,000 of a contribution to a New York 529 plan ($10,000 if filing married jointly) on your state tax return. To check out your state’s plans and tax benefits, see http://www.collegesavings.org/viewState.aspx.
• Even better, some states will let you deduct your contribution even if it was made to another state’s 529 plan. Kansas, for example, allows its residents to deduct up to $3,000 ($6,000 for joint filers) per student per year for contributions to its or any state’s plan.
• And finally, some states, like the federal government, let you withdraw earnings tax free. Again, check http://www.collegesavings.org/viewState.aspx.
If your state doesn’t yet allow a deduction or credit for your 529 plan contribution, keep your eye on your state tax website. More states are moving in that direction.
For more information on 529 plans, check out: