<p>I have a question; is there any advantage to me opening a 529 before the 31st of this year and then withdrawing the funds to pay for qualified expenses on or about Jan 5th? </p>
<p>My thought is that this contribution ($4000, my state limit per year) would then be deducted from the state taxable income for 2009 on my return?</p>
<p>Would this have any bearing on my 1040A form or FAFSA?</p>
<p>My income is about 25K and at the moment, D receives a Pell and our EFC for 2009 was 0.
(I filed a 1040A for 2008 and believe I am eligible to do so for 2009.)</p>
<p>Any thoughts? I could also wait until next August 2010 to use this money for qualified expenses. My bank has a 529 savings account as opposed to a mutual fund instrument and I would be using the former, purely to save on my state income tax bill for 2009.</p>
<p>You get an instant $4000 tax deduction for your 2009 contributions to a 529 in Virginia! Wow! That’s one of the most generous tax incentives I’ve seen. Do you even pay $4000 in state taxes? If not, then the value of the deduction to you is reduced accordingly. For someone earning enough to have a $4000 tax bill, I think your plan would be a no-brainer. For you, you’d reduce your state tax bill to zero (it might be there already), but it would have no effect on your Federal AGI and therefore would not change your FAFSA EFC.</p>
<p>Well the advantage would be the State tax savings, as you have mentioned. It shouldn’t have any impact on FAFSA or your 1040A. $4000 in the bank or $4000 in a 529 is the same as far as FAFSA is concerned. My only question is whether the money would be available to you as soon as January 5th. If your income is $25k and you are 1040A/EZ eligible then you should still qualify for the auto 0 EFC.</p>
<p>One odd thing to look out for as far as 1040A/EZ eligibility is taxable State tax refunds. if you have overpayed State tax in a year that you itemize deductions on your federal returns then any State tax refunds have to be declared as a taxable refund on the next years federal return and cannot be reported on a 1040A or 1040ez making you ineligible for 1040A/EZ. But if you do not itemize (which if you filed a 1040A you did not) then it should not be a problem. We ran into this my daughter’s first year of FAFSA. We had a small State tax refund the previous year and had itemized and were ineligible to file a 1040A or EZ.</p>
<p>swimcatsmom, you’re correct, this is a deduction from taxable income, not a tax credit (momentary brain freeze - I was thinking of Maryland’s 529 contributions which are a direct tax credit against state taxes).</p>
<p>All in all, I think this is worth doing if the OP has an extra $4000 lying around. I don’t see any downside, especially if the 529 is age-based and invested close to 100% in cash.</p>
<p>Actually, swimcat, it was from one of your old postings that I learned about the impact of a tax refund while reading CC last year. I do thank you for this information!</p>
<p>I believe the tax savings could be offset by any bank fees (they are closed right now so I cant ask), and yes, the funds can be, according to the bank lady, available the next day. This is the 529 College Wealth plan in Virginia. I will check into the costs of the account.</p>
<p>Thanks for the info, vball and swim. Every little bit of $$ helps, especially looking at the cost of textbooks for Spring 2010 – in excess of $600 for four classes. Ouch.</p>
<p>The fees on the College Wealth Plan seem a bit high. In fact, it looks like all of the Virginia plans have fees. As a Virginia resident, you should be able to get the same tax deduction regardless of which 529 you invest in, even those from another state. You could probably walk into any brokerage (Fidelity, Schwab, SmithBarney, etc) tomorrow morning and open their most conservative 529 account for no cost and derive the same tax benefit as a result. Or call the help desk at your favorite brokerage to confirm this :)</p>
<p>Here’s a calculator where you can figure out how much in VA taxes you’ll be saving after your $4000 contribution to a 529. I get $195 when I plug in your numbers:</p>
<p>vball, My bank’s website says there aren’t any fees for their College Wealth; but can you point me to where you read about fees? My bank charges for everything else, so why they would have a fee-free 529 is a little odd.</p>
<p>I saw the fees on a couple of websites. It looks like banks can set them individually, but I also saw a website that compares the 3 Virginia plans and it showed fees for all of them. If your bank doesn’t charge a fee, that’s great!</p>
<p>I guess this is a new topic, but I see there is a Hope Credit, an American Opportunity credit and a life long learning credit, and one may be eligible for one of the three or choose the one most favorable. They seem very generous, tax creditwise. Not sure how my D would qualify as most of her fees are paid by grants and our cash portion might be allocated to room and board, which is not a qualified expense. (They are in a 529 thought.) Not sure how 529 monies qualify for these credits, either. Or maybe it is moot since 529 is a state program and the tax credits are federal?</p>
<p>I think the American Opportunity Credit is instead of (or modifies) the Hope credit. It is for 4 years instead of 2 (which the Hope was). They are not both available in 2009 & 2010 I don’t think.</p>
<p>If you have scholarships or grants that are not specifically for tuition and fees then you can use those for the room and board and pay for the tuition/fees out of pocket. Scholarships used for room and board are taxable income (if income is enough to be taxable) but the credit may more than offset it. My daughter has a tuition waiver scholarship so obviously that is for tuition only. She has another cash scholarship that has no stipulations how it is spent so we choose to consider that is used for room and board and her loans and other money for required fees (which at her State U are almost as much as tuition). </p>
<p>The American Opp can be used for money spent on books also.</p>
<p>Opened the College Wealth account (open to non VA residents, btw) with no fee; noted that the bank does a “hard pull” (inquiry) on my Equifax credit report as part of the account process.</p>
<p>D’s grant specifies tuition and fees, so with this account, I can pay for the qualified expenses of room, board, books, and such, and deduct the contribution from my VA state taxes. Not sure if there is any credit, taxwise, in Hope (think this is now in the midwest only), American Opportunity, or lifelong learning available for us due to the grants.</p>
<p>I like this 529 because it is a savings account that does not tie up the funds in the market.</p>
<p>The American Opportunity tax credit can be used for money paid for books. But you can’t double dip - that is you can’t use the money spent for books as a qualified expense for a qualified 529 account withdrawal and also for the tax credit. You must choose one or the other. So you will have to decide which is the best deal taxwise for you. In most cases I would think it would be the tax credit.</p>
<p>Hopefully the 2009 IRS 970 will soon be available so we can learn all the new rules.</p>
<p>What are the federal tax advantages of a 529? Tax free interest growth?</p>
<p>I agree that a tax credit sounds better than the state tax deduction but I can’t figure it out – what if I pay for room and board with 529 funds and NOT books?</p>
<p>You cannot get the tax credits for room and board. But you can use the 529 account funds for room and board. For 2009-2010 you can also use 529 funds for a computer for the student and also internet access (this is new so am awaiting the publication of the actual rules).</p>
<p>You can use 529 account funds for books or you can use the new tax credit for books. Not both.</p>
<p>The IRS publication for education tax benefits is IRS 970. If you google IRS 970 you will find it. But the new one for 2009 is not yet out as far as I can find. The 2008 one does not include the new 529 account rules (computer) or the new tax credit (AM Opp).</p>
<p>I actually do a spread sheet of our expenses and the various tax credits to try and figure out how we would be best off tax wise. Bit of a juggling act sometimes - especially trying to decide whether we should withdraw 529 funds or pay out of pocket and take the credit.</p>
<p>Oh and the Am Opp credit is partially refundable (hope was not). This means that you can get part of the credit - up to $1000 - even if you have no tax liability.</p>
<p>Does the American Opp cfredit include books or computers?</p>
<p>Am I eligible for any credits if I use 529 to pay for a portion of expenses not covered under Am Opp, such as room and board?</p>
<p>Offhand, I think I am better off saving the 529 for the future and going with Am Opp for 2009. I did not use 529 in 2009, of course, so it is not like I have any 529 options as I will for 2010.</p>
<p>Yes the American Opp covers books and course materials. Not generally computers unless the computer is needed for enrolment in a course or attendance at the institution. </p>