<p>We never did set up a 529 before -- might have been a mistake although we were worried about losing $ as many such funds actually have. But now with a kid about to enter college, it seems like it makes sense to dump in funds into our own state's 529 (low risk fund) just to get the state tax benefit, no?</p>
<p>I guess there is no good way to make tuition fed tax deductible... (does AMT swallow it up? that $4000 is only good for low-ish AGIs and doesn't begin to cover it...)</p>
<p>I’ll be following this thread with interest because we are in the same boat and considering the same thing. Not all states offer the state tax deduction, but ours does so if it offers a plan with a low-risk fund, we will definitely want to look into that further.</p>
<p>We’ve done just that for D2. As PA residents, we set up a guaranteed tuition plan for each daughter about ten years ago. I never really understood how it would work, so we didn’t put a lot money in them. We used up D1’s in her first semester…and it was easy to get the money, etc. </p>
<p>D2 is full pay at Pitt. For 2010 we took money out of the plan to pay the bills from Pitt. We then turned around and put other cash into the plan, PA income tax free. It was a nice savings. </p>
<p>We will do the same thing for the next couple of years. Just have to get the timing correct…(for this particular plan) the money has to be in the plan for one year before we can use it for school expenses.</p>
<p>For our state (and at least several others where I’ve checked), the money only has to be in the account for 10 days before it can be withdrawn to use for school expenses. There is a guaranteed option (in terms of the various investment choices) that pays around 3% per year - so no risk at all. For our state, up to $20,000 of 529 contributions are deductible from state income tax for a couple married filing jointly ($10K if single). WIth a marginal state income tax rate of 5.5%, a couple can save up to $1100 in state income tax. A very good deal! The first calendar year (kid’s first semester of school), we only funneled $5400 through the 529, but still saved $297 in state tax and made a tiny bit on the earnings. Every little bit helps!</p>
<p>isn’t it just the earnings on the investment that are state tax deductible?</p>
<p>The earnings are exempt from Federal and state income tax.
In many states, but not all, the <em>contributions</em> are deductible from state income tax, up to a certain limit.</p>
<p>It depends on the state. In Vermont for example:
</p>
<p>A possible caveat:</p>
<p>
</p>
<p>I <em>think</em> that a couple in Vermont paying more than 9K toward college expenses could still put 5K through the 529 to get that $500 credit and then use the next 4K of expenses to get the American Opportunity Credit, but I’m not entirely sure how that all works.</p>
<p>mathmomvt-
529 funds can be used for room and board, in addition to the books, tuition and fees that qualify for the AOC. Also, in 2009 and 2010, 529 funds could be used to pay for a computer and computer supplies, certain computer software, and internet access. No longer true for 2011, unfortunately.</p>
<p>You would have to calculate your particular situation, but the benefit may not be as much as you expect. First there is a maximum you can contribute per year. It is $12,000 per individual or $24,000 for both the spouses combined. You can make a one time contribution of $60,000 per parent or $120,000 for both parents but cannot make another contribution for 4 more years.</p>
<p>List below gives the state tax benefit by state</p>
<p>In a few states like S Carolina and W Virginia, your entire contribution is deductible (remember this is a deduction and not a tax credit). So if your marginal tax rate is 5% and you contribute $120,000, you get a tax reduction of $120,000*5% or $6000. (Again this is assuming your tax liability is greater than $6000. If it is not, then your benefits are less.)</p>
<p>On the other hand if you live in Maine ($250) or Arizona ($750) per person, your saving is not much. For example in Arizona if you and your spouse contribute $120,000 you will get a tax deduction of $1500 and that means a saving of $75. The cost of opening the account and managing it may be more than that. If your marginal tax rate is 3.5%, then your savings are even lower.</p>
<p>The advantage of a 529 plan is that it allows principal to grow tax free, so if you put $12,000 when the child is 1 year old, it will grow for 17 more years tax free.</p>
<p>If you put money in a 529 plan you have to keep records of how you spend it. So look at your specific situation and determine if it makes sense to park in a 529 fund a for a short period of time. It may or may not be worth it. A lot depends on how much money you are putting in and what your marginal tax rate is.</p>
<p>[529</a> Plan State Tax Deductions for 2009 – State Tax Deductions for Contributing to a 529 Plan](<a href=“http://collegesavings.about.com/od/section529account1/a/529stateded.htm]529”>States That Offer the Best 529 Tax Advantages)</p>
<p>Alabama - $5,000 per contributor</p>
<p>Arkansas - $5,000 per contributor</p>
<p>Arizona - $750 per contributor</p>
<p>Colorado - Full amount of contribution</p>
<p>Connecticut - $5,000 per contributor</p>
<p>Wash. D.C. - $4,000 per contributor</p>
<p>Georgia - $2,000 per child</p>
<p>Idaho - $4,000 per contributor</p>
<p>Illinois - $10,000 per contributor</p>
<p>Indiana - 20% tax credit up to $1,000</p>
<p>Iowa - $2,685 per beneficiary</p>
<p>Kansas - $3,000 per contributor, per child</p>
<p>Louisiana - $2,400 per contributor</p>
<p>Maine - $250 per child</p>
<p>Maryland - $2,500 per beneficiary</p>
<p>Michigan - $5,000 per contributor</p>
<p>Mississippi - $10,000 per contributor</p>
<p>Missouri - $8,000 per contributor</p>
<p>Montana - $3,000 per contributor</p>
<p>Nebraska - $5,000 per tax return</p>
<p>New Mexico - Full amount of contribution</p>
<p>New York - $5,000 per contributor</p>
<p>N. Carolina - $2,500 per contributor</p>
<p>Ohio - $2,000 per child, per donor</p>
<p>Oklahoma - $10,000 per contributor</p>
<p>Oregon - $2,000 per contributor</p>
<p>Pennsylvania - $13,000 per child, per contributor</p>
<p>Rhode Island - $500 per contributor</p>
<p>S. Carolina - Full amount of contribution</p>
<p>Utah - 5% tax credit on max of $1,740 tuition per beneficiary</p>
<p>Vermont - 10% credit ($250 max.) per child, per contributor</p>
<p>Virginia - $4,000 per account, per year (unlimited over age 70)</p>
<p>W. Virginia - Full amount of contribution</p>
<p>Wisconsin - $3,000 per dependent, grandchild, or self</p>
<p>Usual caveats, not a tax lawyer or accountant, so please consult a professional if you have questions.</p>
<p>OP you are right. There is no federal tax deduction and there are federal contribution limits that I mentioned in my previous post. Earnings are tax free and the only deduction you get is on state taxes. So make sure your analyze it for your situation.</p>
<p>
Ok, so this is really an AOC question more than a 529 question, but suppose my S goes to a school that gives him a “full tuition” scholarship as a NMF, and we pay his room & board etc. expenses out of pocket. For tax purposes, are we allowed to “treat” part of the scholarship money as covering his living expenses, and then take the AOC for paying part of his tuition? In that case, some of the scholarship would be taxable though – to the dependent student, or to the parents?</p>
<p>
</p>
<p>I think you’re referring to the old gift limitations. A contribution to a 529 is considered a gift, and therefore falls under the IRS gift tax rules. In 2010 and 2011, the amount that can be gifted without triggering gift taxes is $13,000 per person per year, or $26,000 if both parents give the child money in one year.</p>
<p>
</p>
<p>No, if the scholarship is specifically for tuition, you would not be able to treat it as paying for a living expense. If he receives scholarships that aren’t restricted, then you’re free to treat them as you wish.</p>
<p>vballmom: You are right. It used to be $12000 and is now $13000 and is the limit that will not trigger gift taxes. In OP’s case if they give more than this amount, the whole purpose of reducing taxes is naught, and hence their contribution to the 529 plan should not exceed $13000 (or $65000 if they use the 5 year clause).</p>
<p>As I understand the OP wanted to get a tax benefit on the money being spent for college.</p>
<p>Yes, in our case, the state is NY, so as I understand it, we would get a state tax deduction on up to $10,000/year, and being state, escapes AMT nonsense that kills so many of our other deductions. It would seem that mostly we would be balancing it against the cost of setting up and contributing to the 529 as well as the hassle factor. Still it would seem that we’d gain something like $600-650. Not much but not nothing…</p>
<p>In VA the 4k/yr has unlimited carryforward. So if you contribute 12k this year you are good for two additional years.</p>
<p>
</p>
<p>Yes, that is trade off, unless you are willing to keep the money there for some time, like say one year. If you can avoid not using the money for one year and you put $10,000 and get say 5% return, then you say taxes on the gain as long as you use it for qualified expenses. If you can avoid using that money for two years or more, the benefits increase correspondingly.</p>
<p>Was just thinking about this today as I was thinking about parking first semesters expenses in a cd for a couple of months until it is due in July/Aug. Will only save $500 in state taxes, but that’s one semesters books. CD would only pay like $15.</p>
<p>Check around for better CD rates. One of my credit unions is paying 1.5% on 12 month CDs with a low minimum.</p>