Four things to
consider: (1) state income tax, (2) federal income tax, (3) federal gift tax,
and (4) plan’s allowable maximum.
If your state
levies an income tax, it may offer a tax deduction for contributions to the
state’s 529 college savings plan. For example, here in Oregon where I am,
individual filers can deduct up to $2,300 of contributions from taxable income,
and married filing jointly can deduct up to $4,600. $4,600 at a 9% tax rate is
about $414 in state income tax savings.
beneficiary draws on the plan, they will not pay any state income taxes as long
as the funds are spent on eligible higher education expenses.
You receive no
federal income tax deduction for contributions to 529 plans. But as above, when
the beneficiary draws on the plan, they will not pay any federal income taxes
as long as the funds are spent on eligible higher education expenses.
everyone has a $14,000 (per donee) federal exemption from having to file Form
709 (Gift Tax Return) and claim any of their lifetime gift and estate tax
exemption. Special provisions for 529 college savings plans allow you to “front-load”
your contributions by giving up to 5 years worth ($70,000) all at once. You
then have to wait 5 years before making further contributions or use up part of
your lifetime exemption. If you’re married, you and your spouse could give up
to $140,000 all at once…per beneficiary.
Each state that
offers a 529 sets their own maximum allowable amount for the plan
(contributions and earnings growth). If you plan to make substantial
contributions and/or others will contribute to the same plan, you’ll
want to check you particular state’s limits.
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