How can I get a tax deduction for contributing to a 529 college-savings plan?
Thirty-four states and the District of Columbia offer state tax deductions for your 529 contributions. In most cases, you need to contribute to your own state’s plan to qualify for the tax break. But five states -- including Arizona, Kansas, Maine, Missouri and Pennsylvania -- give you a tax break for using any state’s 529 plan.
In most states, you must contribute to a 529 before December 31, 2009, to qualify for a 2009 tax break. And a few key strategies can help you make the most of your state’s tax deduction.
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Know who qualifies for the tax break. In some states, anyone who contributes to a 529 can get a tax deduction -- no matter who owns the account. But in others, such as Washington, D.C., only the account owner can qualify for the tax break. And Virginia’s rules are unusual -- only the account owner can deduct 529 contributions; if anyone else contributes, the account owner can also deduct those contributions.
If your state limits the tax deduction to account owners, grandparents and others looking for a tax break may want to open a separate 529 for the child even if the parents have one. There’s no limit to the number of 529s that can be open for one child (although some states allow you to have only one plan per beneficiary in that state), and it doesn’t matter where the child lives.
Pick the best plan.It’s generally best to contribute to your own state’s plan first if your state offers an income-tax deduction for your contributions. But if you live in one of the five states that give you a tax break no matter where you invest or if your state doesn’t allow a tax break, consider some of Kiplinger’s favorite 529 plans.
Keep track of annual deduction limits.The size of the tax break can vary a lot by state. Some states allow you to deduct your entire 529 contribution from your state income tax in the year you contribute the money. Others limit the deduction to a few thousand dollars but may let you roll over the excess to future years. For example, most Virginians can deduct only up to $4,000 per contributor per year from their state taxes, but have no time limit to carry forward excess contributions to future tax returns. However, taxpayers who are at least 70 years old can deduct the full amount in the year the contribution was made. Check your state’s rules before deciding how much to contribute each year. In some states, it may be better to spread your contributions over more than one year so you don’t put more than the maximum in the account.
Also remember the gift-tax rules when deciding how much to contribute each year. In most cases, you may be subject to gift taxes if you give anyone more than $13,000 for the year (a married couple can give up to $26,000 per person for the year without being subject to gift taxes). But there’s a special exception for 529s: You can contribute five years’ worth of gifts at once (each person can contribute up to $65,000 per child; or a married couple can contribute up to $130,000 per child) in one year without triggering the gift tax. See The Gift Tax: Use It or Lose It for more information.
Don’t forget the deadlines. In most states, you can get a 2009 tax deduction only if you make your 529 contribution by December 31, 2009. Some base the deadline on the postmark; others count the date the check is delivered. And a few states, such as Oregon, give you until April 15, 2010, to make tax-deductible 529 contributions for 2009.
For more information, see The Best 529 College-Savings Plans, 529 Plan FAQs and SavingForCollege.com.
Got a question? E-mail me at askkim@kiplinger.com.
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