If you’re paying state income taxes and tuition or student loans, but you don’t have a 529 account, you’re probably leaving money on the table.
You may be able to claim a state income tax deduction or credit by “dipping” funds into a 529 account, even if you make an immediate withdrawal!
Contributions to a 529 account are not tax deductible at the federal level, but most states offer deductions or credits against state income tax. Also, most 529 plans allow you to withdraw funds for qualified education expenses at any time.
College tuition isn’t the only qualified education expense, either.
The Tax Cuts and Jobs Act expanded the definition of qualified education expenses to include up to $10,000 of K-12 tuition per year, per beneficiary.
Then, the SECURE Act further expanded the definition of qualified education expenses to include up to $10,000 of student loan repayments!
Ultimately, what this means is that you could deposit cash into a 529 account, withdraw the funds immediately to pay for qualified education expenses, and get a tax break on your state income taxes.
It’s important to check the details in your personal situation. Unfortunately, 529 plans are administered at the state level. Each state has slightly different rules, plan offerings, investment options, etc. Also, be sure to verify which expenses are considered qualified education expenses in your case. This strategy won’t work for every person in every state, but it is widely available.
It’s far beyond the scope of this article to outline each state plan in detail. Luckily, savingforcollege.com has already done that.
If you plan to dip funds into a 529 plan for immediate withdrawal, be sure the money isn’t invested. Most funds include minimum holding periods, but you should be able to keep the funds in cash, or in a money market fund with very short holding requirement (i.e., 5 – 10 days).
This strategy could be especially lucrative for parents who plan to enroll their children in private school, since they could get tax breaks for the two decades that span kindergarten to graduate school.
If you live in a state with income tax, and you’re paying tuition or student loans, you should probably be utilizing this strategy to claim tax breaks for expenses you’re already incurring.
Important Legal Junk
This content is not intended as tax, accounting, legal, or financial advice. This information should not be relied upon as the sole factor in an investment or tax related decision. The information on this site is provided “AS IS” and without warranties of any kind either express or implied. Tax code changes frequently, and although we strive to keep our articles up to date, you should consult your tax advisor about how this or any other information is pertinent to your personal situation.