What is a 529 plan, and how can it help you and your college-bound student?
According to the Internal Revenue Service, a 529 plan is “operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training.” (See 529 Plans: Questions and Answers | Internal Revenue Service)
In 2015, A+ published an informational article on the benefits of 529 plans for Pennsylvania residents, specifically in relation to state and federal taxes. We thought we would revisit the subject to see what (if anything) has changed in the last three years.
Bolded bullets are from Lesley M. Mehalick’s October 23rd, 2015 article “Saving for College: Tax Treatment of 529 Plans.”
“Monies deposited into a 529 plan are ‘after-tax’ dollars… [They are] not treated as a Federal income tax deduction.”
According to the IRS, both of these statements are still true in 2018.
“Contributions to a 529 plan…are eligible to be deducted from Pennsylvania income tax.”
This is also still true.
“Pennsylvania allows a Pennsylvania income tax deduction for contributions into a 529 plan up to the annual gifting exclusion amount ($14,000 in 2013) per beneficiary.”
This limit has recently increased. In 2018, a Pennsylvania taxpayer can contribute and deduct $15,000 “per beneficiary per year, up to the amount of taxable income reported on the PA-40 return.” The Pennsylvania Department of Revenue offers information about deducting on their webpage. While you are there, check out answers to other FAQs about 529 contributions as well!
“Pennsylvania does not currently offer an income tax deduction for other possible types of college savings, such as a Coverdell Educational Savings Account or a Uniform Transfer to Minors Custodial Account.”
In 2018, the 529 plan still holds this advantage over the two named accounts.
“Qualified distributions from a 529 plan will be exempt from both Federal and Pennsylvania income taxes. Qualified distributions are those made for the designated beneficiary’s payment of qualified higher educational expenses.”
Good news! The IRS has expanded the definition of “qualified” to include “the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access.” Basics such as tuition, supplies, room and board are of course still covered.
As always, when making major decisions about money, investments, and your student’s future, getting the advice of an expert (or a few experts) is wise. According to accountant Felix Agbessi, EA (My Accounting Partner, LLC), surprisingly few parents take advantage of the 529. However, those of his clients who do save have started early.
“As a tax preparer, I don’t often come across taxpayers with 529 savings plans. I have a couple of clients who have young children and are saving for their college. One family has been contributing since 2013. Contributions do not have any effect on their federal returns, but as they are from Pennsylvania, we can deduct contributions on state returns. Every little bit helps!”
At A+ Test Prep and Tutoring, we have an excellent team of tutors who can help you with standardized testing goals or achievement in any other school subject. Our Client Service Directors Anne Stanley and Susan Ware are available to answer your questions and provide solutions. You may reach either of them by calling A+ Test Prep and Tutoring at 215-886-9188.