Could You Get a Tax Benefit for Saving for Your Child’s Education?

by Miranda Marquit · 1 comment

With back-to-school in full swing, parents are researching how to give their children a head start in paying for college. Many look to 529 plans.

With education costs increasing, and more students using loans to cover their university needs, it makes sense to consider a 529 plan.

And, as we approach the end of the third quarter of the year, it’s also a good time to do a little tax planning. Not only could your contributions to a child’s 529 college savings plan help him or her save for the future — but it could also mean a tax deduction for you right now.

Get Deductions on State Taxes with 529s

Regular contributions to a 529 plan can result in accumulated wealth that helps your child pay for school. The rise of student loans is becoming a problem for many students, who then graduate with loads of debt. Starting early to save up for these costs can reduce — or even eliminate — the need for student loans.

What’s even better is that there might also be a tax incentive for your efforts. Many states offer tax deductions for contributions to 529 plans. It’s important to note that the federal government doesn’t offer a tax deduction for contributions to a 529. But the money in the account does grow tax-free, so your child doesn’t have to pay taxes when they withdraw the money for school.

Many consumers, however, forget that states also collect taxes. This is how a 529 plan can benefit you right now. There are 35 states that offer you a tax benefit for contribution to your state’s 529 plan. (Be aware that it usually has to be the plan offered by your state, and not one offered by another state, or by a brokerage.) There are even a few states that will give you a (reduced) tax benefit if you contribute to¬†any 529 plan.

Your contributions can provide you with a decent tax deduction now, and your kids with tax-free growth later.

The Details of 529 Tax Benefits

The amount of tax benefit varies by state. The current contribution limit for 529 plans is $14,000 per beneficiary per year. It’s worth noting that your spouse can also contribute. So, if you’re married, and you have two children, you and your spouse can each contribute $14,000 to each of your children. That amounts to $28,000 per child — $56,000 in total — for the year.

The rules of contribution also allow you to make five years’ worth of contributions all at once. In the case of the example above, that would mean $140,000 per child, or $240,000 total. You won’t, however, be able to make contributions again until year six of the plan. If you’re trying to reduce the size of your estate, this can be one strategy to use. And, depending on the state, this can also help you significantly reduce your income if you’re trying to offset a large windfall.

Make sure that you understand the tax benefit rules in your state. Many states cap the benefit, so once you get past a certain amount, it’s no longer worth it to contribute — that is, if you’re most interested in the tax planning aspect.

Have you received tax benefits for contributing to your child’s 529 plan?

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{ 1 comment… read it below or add one }

Kostas @ Finance Blog Zone August 27, 2013 at 1:01 pm

It would be nice if there were deductions on the federal level, but any help, even on state taxes, is a plus. With the price of a college education increasing rapidly, growing a 529 savings plan for your child will be a big advantage once they reach the college years.

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