Georgia taxpayers can now take up to a $2,000 deduction per return for contributions made on or after January 1, 2007 to Georgia-sponsored 529 Plans regardless of their income level. The dependency and itemization requirements have also been removed.
Highlights
Anyone, regardless of income, can open a 529 College Savings Plan account. Contributors can choose from various investment options in a 529 Plan, and earnings grow free of federal and state income taxes in most cases. Generally, no taxes are owed on withdrawals made to pay for qualified higher education expenses. Also, some states allow individuals who fall under certain income levels to take a state income tax deduction for a portion of the contributions.
Types of Accounts
There are two types of 529 Plans: Prepaid College Tuition Plans and College Savings Plans. A Prepaid Tuition Plan allows you to pay now to cover tuition costs in the future—you buy college at today’s rates. Given the ever-increasing costs of college, this may sound great; however, most of these plans guarantee that you will be covered only if your child attends a public, in-state college or university. If your child were to be accepted to a private school, you could be significantly underfunded.
A 529 College Savings Plan allows you to make contributions and choose among the investment choices offered by the state’s plan. The IRS recently announced that you are allowed to change your investment options once each year. Check the specific state plan you are considering to determine if it includes this feature. A key feature of the 529 College Savings Plan is that most states do not have residency restrictions on who contributes, and they generally allow you to attend college in the state of your choice.
The Basics
The 529 College Savings Plan program is designed to help families save for the costs of higher education. Qualified higher education expenses are tuition, fees, the cost of books, supplies and equipment, and room and board for students who attend at least half-time as determined by the college they are attending. An eligible education institution is generally defined as an accredited, postsecondary educational institution offering credit towards a bachelor’s degree, an associate degree, a graduate level or professional degree, or another recognized postsecondary credential.
You Own the Account
As the parent or contributor to the account, you must name a beneficiary. You retain control of the account as the owner. This means the beneficiary has no right to the funds. Generally, the plan allows you to transfer the account balance to another beneficiary with no tax consequences. The transfer must be to a “member of the family” related to the beneficiary as defined by the tax code. The definition for “member of the family” now includes the beneficiary’s first cousin. Caution: If you do not transfer the account according to federal tax law, the earnings on the account are taxable and an additional 10% tax is imposed.
Tax Free Growth
Your investment grows tax free while in the plan and qualified withdrawals (i.e., those used for qualified higher education expenses of the beneficiary) are not includable in Federal taxable income of the account owner or beneficiary. In most states, qualified withdrawals also are not includable in state taxable income if the contributor or student is an in-state resident. In 2006, legislation was passed permanently making the withdrawal of earnings used for education non-taxable.
Financial Aid Implications
With regard to financial aid, the federal methodology views both types of 529 Plans the same. That is, the assets are treated as belonging to the account owner. If the parent is the account owner, this means that a financial aid officer could count up to 5.6% of the account balance when assessing your child’s financial aid eligibility. Under the institutional methodology, 2.6% to 5.6% of the account value is assessed in determining financial aid eligibility for either type of 529 Plan.
A Gifting “Gotcha”
Contributions you make to a 529 Plan are gifts to the beneficiary and subject to the gift tax rules. This means that you, or anyone, can gift a child $13,000 in 2012 and $14,000 in 2013 nd not incur the gift tax. If you gift more than $14,000, you will generally owe gift taxes. However, careful planning could allow you to pay for your child’s or grandchild’s college education by directly paying the financial institution and gift the child $14,000 each year. See the article entitled, “A Gifting ‘Gotcha’—Gifting and Qualified Tuition Plans” for more information on this.
Need More Information
Joe Hurley, C.P.A., has a great website at www.savingforcollege.com that provides information for most state plans, and offers an easy to understand overview of various 529 College Savings Plans. Also, there are various calculators at www.smartmoney.com that help you analyze different state plans and estimate the contributions needed to fund your child’s college education. If you would like any further information regarding this issue, as well as any other tax related issue, please contact Henssler Financial’s Tax Experts at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
