New Benefits for College Savings Plans
March 26, 2014
Many states have instituted new benefits for college savings plans, says Stateline.
College savings plans, or 529 plans, are available in every state but Wyoming, and they are intended to help families save for their children's college educations:
- Thirty states and the District of Columbia allow 529 savers to deduct their contributions from their state income taxes.
- State limits on deductions vary -- in Maine an individual can only deduct $250, whereas an individual in Illinois can deduct $10,000.
- Three states offer tax credits for 529 contributions.
- Under the federal tax code, 529 contributions are not deductible from the federal income tax, but the contributions grow tax-deferred.
There are two different kinds of 529 plans:
- The first is a savings plan, similar to a 401(k) or an IRA, in which the saver invests in mutual funds.
- The second is a prepaid plan, which allows savers to go ahead and pre-pay the entire cost (or part) of in-state public college tuition, in order to avoid any future price increases. Sometimes, the prepaid plans can be used at private and out-of-state schools.
With college tuition skyrocketing, states are making efforts to encourage the use of 529 plans.
- Maine is investing $500 in 529 accounts for each baby born in the state through a partnership with a foundation, which says that the $500 could triple over the course of 18 years.
- Last year, Arizona increased the maximum deduction for 529 contributions to $2,000 for individual filers, up from $750. Nebraska also increased its deduction, from $5,000 to $10,000.
- The Wisconsin legislature recently approved a bill that would let taxpayers carry over deductions into the next year. So, if Wisconsin taxpayers reach the state's $3,000 annual deduction limit, anything above that amount can be rolled over to next year and deducted from the state income tax.
- In Montana, taxpayer contributions to a 529 plan outside the state of Montana are now eligible for a Montana income tax deduction. Five other states allow their taxpayers to deduct 529 contributions, no matter the source of that 529 account.
On the other hand, North Carolina did away with its tax deduction last year as part of a major tax code overhaul. However, the standard deduction for most individuals was increased, more than making up for the elimination of the 529 deduction, according to the bill's sponsor.
Source: Elaine S. Povich, "In Some States, New Benefits for 529 Savers," Stateline, March 18, 2014.
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