Minnesota recently passed legislation that allows either a credit or a deduction for Minnesotans saving for college through a 529 savings plan. The tax credit and new deductions aren’t limited to in-state 529 college savings plans, but to any 529 college savings plans or accounts.
In addition, the tax credit or deduction applies to all contributions that were made in the 2017 taxable year.
This deduction only applies to state taxable income. Contributions are not deductible on federal taxable income. However, earnings from these contributions are not subject to federal tax.
Here’s what you need to know about the new Minnesota legislation – a person can claim only the credit or the deduction:
- Individuals can take up to a $1,500 state tax deduction (or $3,000 if filing taxes jointly) on an annual basis regardless of income level. There are no income phase-outs for the deduction.
- For those who contribute up to $500, a 50% in-state tax credit is available. The credit is phased out for those with an AGI-adjusted gross income starting at $75,000 a year.
What is a 529 College Savings Plan?
A 529 plan, also known as a qualified tuition plan, is a means of saving for higher education for a designated beneficiary. In addition to the contributions now qualifying for a tax deduction or credit for Minnesota taxpayers, the investment earnings grow tax deferred.
Contributions are limited to the amount a beneficiary needs for educational expenses. The beneficiary can use the funds in a 529 account for qualified expenses, such as tuition, books, supplies, room and board, computer technology, computer-related equipment and internet access. If the original beneficiary does not go to college, the account holder can change the beneficiary to another member of the family. The purchaser of the account, instead of the beneficiary, controls the funds until they are withdrawn.
There are two types of 529 plans. With a pre-paid tuition plan, the cost of tuition is locked into current prices. With a savings plan, the sponsor accumulates future college funds through contributions and investments. All 529 plans conform to federal guidelines, but specifics in the plans vary from state to state. Because 529 plans have no residency restrictions, sponsors can invest in plans in any state.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.
Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.