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State Tax Deductions for 529s

Discussion in 'Taxes' started by Cytraveler, May 28, 2016.

  1. Cytraveler

    Cytraveler Level 2 Member

    Just a suggestion that if you have kids in college, or you have tuition for yourself, even if you haven't saved money in a 529 already, or saved less than you will spend on tuition, you may still be able to get a state tax deduction.

    It's going to depend on your state and the 529 plan you use. In PA, where I live, I can contribute AND deduct up to $14,000 per parent for a max of $28,000/year (only up to the income actually earned by each parent, so if only one of you earns $$ you can only deduct $14k). In PA, you can use any state's 529 plan and get the tax deduction (this isn't true in all states; many of them require you to use their plan for the state tax deduction). And I use NY's 529 plan, which has low-cost index funds (of course that doesn't matter for funds you're putting through fast, but I have some longer-term money saved there too). The NY plan only has a hold of about a week, so I can contribute money to the plan, then a week later withdraw the money and send it to the college. And it's all deductible on my state taxes.

    Federal tax deductions for 529 are all about the earnings: you aren't taxed on the earnings, so you won't get federal tax deductions for money you're contributing that you have to use soon. But state tax deductions - at least in PA - are simply based on making the contribution.
  2. Matt

    Matt Administrator Staff Member

    The hold time is just the admin process with NY. And while it can theoretically work like you say, some States also demand longer holding period in order to claim the deduction, such as different calendar year or 12 months... I'm not sure what PA does for that, but something for people to be aware of.
  3. Cytraveler

    Cytraveler Level 2 Member

    PA doesn't have holding periods - that is, from the tax standpoint for PA taxpayers. I don't use the PA funds. I'm not sure about this, but I think a 529 fund itself can also have longer hold times than just the admin process; anyone know?

    It definitely varies by state, and PA is the most liberal, so YMMV. And these funds are set up with the purpose of longer term saving, and that's the only way you get the federal tax advantage. But depending on where you live, it's a way of increasing your state tax deduction up to the amount of the tuition you're paying if you didn't fully fund your 529 before.
  4. volker

    volker Level 2 Member

    In VA you only get a state tax deduction if you invest in their own VA 529 plan. If you keep the money invested long therm the tax deduction doesn't even pay off due of their high fees and you are better off investing in another states 529 plan.

    So its worth to look at your own states but always do the math.
  5. Cliffbar

    Cliffbar Level 2 Member

    Keep in mind that only six states offer tax breaks for out of state 529s: Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania. Also, I'm surprised to hear that the fees are so high in VA; their 529 is rated silver by Morningstar.
  6. volker

    volker Level 2 Member

    It probably depends on the annual contribution, how much you have already in the plan and how you want to setup your portfolio. For my personal case the options of the NY plan is much better and provides more flexibility and options while having lower fees. When I did the math for my case the NY529 made long term more sense.
  7. Cliffbar

    Cliffbar Level 2 Member

    I'll also add that the tax benefits of 529s can vary greatly by state. A few states offer tax credits instead of deductions, which can make a big difference. For example, Indiana offers a 20% credit on contributions up to $5k. At a 3.4% income tax rate, this would lead to someone with a taxable income of $60k cutting their state income taxes in half. You can see the benefits by state here.
  8. Cytraveler

    Cytraveler Level 2 Member

    That site gives a good explanation of strategies. I think it might be where I got the idea to get the state deduction even for current year tuition due, where we hadn't saved all of the money already. Looking at the combination of your state income tax, how long your state requires you to hold money before withdrawing and getting the tax deduction/credit, fees, and how long the money will be invested - all factors.
  9. El Ingeniero

    El Ingeniero Level 2 Member

    Forgot Michigan.

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