Executive Director, Illinois Student Assistance Commission
December 15, 2014
As we approach the holidays, probably the last thing anyone wants to think about is taxes. But since 529 plans have some significant tax advantages, it’s worth having the conversation—even at this busy time of year.
In general, while contributions to a 529 plan are not deductible on your federal tax return, your investment grows tax-free, because plan benefits are exempt from state and federal taxes if used for a qualified higher education expense–including payment of tuition and fees.
The big tax savings on 529 plans can come at the state level. In addition to tax-free plan earnings for benefits paid for education, many states offer tax deductions or matching contribution benefits, although the amount of the tax deduction for contributions varies by state. My home state of Illinois, for example, is just one of the states with a generous tax deduction. It’s important to note that to take a state tax deduction in the current year, the account owner must actually make the contribution in the current year. In some states, anyone who contributes to a 529 plan can take a deduction not just the owner of the account. It’s important to check with your state and/or tax professional to see what kind of plans and tax benefits might be available, and the parameters for taking any deductions.
While it’s hard to wrap neatly with a bow, a nice tax deduction can be a pretty good holiday gift for you and your family!
Note: This information is offered for educational purposes only and is not intended to provide legal, tax or investment advice as individual tax situations may vary.
Eric Zarnikow is Executive Director of the Illinois Student Assistance Commission (ISAC), a state agency focused on making college more accessible and affordable for Illinois families. ISAC administers the College Illinois! 529 prepaid tuition plan, in addition to engaging in college outreach across the state and administering over $380 million in scholarships and grants. Zarnikow is a certified public accountant and holds an MBA from Drake University.