TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, June 10, 2006

Short-Term Use of § 529 Plans Can Yield Big State Tax Savings

Interesting article in the Weekend Wall Street Journal:  A Break Lurks in College Tuition; Some "529" Plans Offer Underused Move For Tax Deductions, by Ron Lieber:

If you're writing a college-tuition check this summer, there may be a backdoor way to deduct a chunk of the payment that's perfectly legal yet utterly underutilized. The trick is to make a contribution to your state's "529" college-savings plan, as long as it's one of the 26 states (plus the District of Columbia) that give you a tax deduction or credit when you deposit money. Then, simply withdraw the money and use it to pay the college bill....

[T]hose 26 states, plus the District of Columbia, also award a state tax break for residents' contributions to the state's own 529 plan (every state has them). Kansas and Maine go further -- starting next year, they'll give deductions for deposits in any state's plan. These deductions are generally good immediately. So there's usually nothing stopping you from using the accounts as a temporary parking spot for money on its way to the bursar's office. Tell grandma and grandpa, too, if they want to help with tuition, since they're often eligible for the same tax breaks. How much might this be worth each year? It depends on your state's tax rate and whether it limits the size of your annual tax break for making a 529 deposit. It could be a high three-digit number per household in New York, or $1,000 in Indiana (starting in 2007). Colorado, New Mexico, South Carolina and West Virginia don't limit the annual deduction.

For a great chart showing the annual limits on tax deductions and credits in these states, see here.

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