Schooling has changed a lot during the COVID-19 pandemic. Remote learning is more common. Where students have returned to classrooms, they and their teachers must deal with physical re-arrangements.
One thing, though, remains the same. Education costs continue to climb. That’s particularly true for college expenses.
But there is a popular way to save for your youngsters’ secondly educations and get a potential tax break, too. As long as you act quickly.
When you contribute to a child’s 529 plan, many states allow you to claim a state tax deduction.
And in many states, to get that tax-saving state benefit, you need to put money into a 529 by Dec. 31.
529 education tax benefits: A 529 plan gets its moniker from federal the Internal Revenue Code section that created it. The education savings option, however, actually is a state-administered program.
There are two types of 529s, prepaid tuition plans and the more-popular education savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan.
The money in the 529 grows tax-free and account distributions aren’t taxed when the money is used to pay allowable education costs.
Although they were created to pay for such things as college tuition, room and board, most classroom-related fees, books, supplies and equipment, law changes have expanded the allowable uses of 529 funds. The savings now also can be used for kindergarten through grade 12 education costs.
And you can cross state lines. You don’t have to pick a plan offered by your home state. If you live in Illinois but find you like Oklahoma’s 529 offering better, go for it. You can use any 529 college savings plan to pay for eligible institution expenses in any state.
Tax breaks for contributors, too: As for tax benefits for 529 contributors, things aren’t so straightforward.
As mentioned, although these accounts were created as part of the U.S. tax code, you don’t get a federal tax break for 529 plan contributions.
However, most of the states that have these educational savings plans and state income taxes do offer some tax-saving benefit at that level.
The state breaks, either a tax credit or tax deduction against the states’ taxes, vary by jurisdiction. So do the deadlines for taking advantage of them.
December deadline looms: To get the benefits for the tax year, most states require you to put the money into the 529 by Dec. 31.
A handful, however, provide more time, typically into April of the next year.
Saving for College has the deadline details (and more) on 529 plan contributions in order to claim tax benefits in the 34 states and District of Columbia that offer the plans. Your state’s tax department also should have specifics.
When you get a few minutes this hectic holiday season, check out your state’s 529 rules and benefits. Putting a few extra dollars into the education account could be a nice present for your students now and your state tax bill next year.
You also might find these items of interest:
- Tax-smart ways grandparents can help pay for college
- ABLE accounts offer tax-favored savings help to disabled individuals
- Make paying for college a family affair, with contributions from parents, kids and Uncle Sam
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