A recurring phrase uttered at holiday season family gatherings is "you've grown so much since I last saw you!" What that usually means for many parents of those youngsters is that they will soon be heading off to college.
And that move to campus means that mom and dad will have to come up with big bucks.
The best way to pay for higher education costs is with funds from a 529 plan.
529 education benefits: This savings plan gets its name from the section of the Internal Revenue Code that created it. The plans, however, are state-administered. And they offer tax savings on both the federal and state levels.
At the federal level, 529 contributions grow tax-free and account distributions aren't taxed when the money is used to pay allowable education costs. Those eligible expenses originally applied to college costs, such as tuition, room and board, most classroom-related fees, books, supplies and equipment.
But law changes have expanded the use of 529 funds to kindergarten through grade 12 educational costs and student loan payments.
Different federal, state contributor tax benefits: Many savings plans that are part of the tax code offer tax breaks for those who contribute to them. Not so for 529s.
There is no federal tax deduction for 529 contributions.
At the state level, however, you might be able to get a tax break for the money you put into this special educational savings plan.
Most states that have an income tax, and that's most states, allow either a tax deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes.
To get this state tax benefit, you must make a contribution to your youngster's 529 plan by a certain date. If you miss that deadline, you miss the state tax break.
State tax breaks for contributors: The states' tax breaks vary by jurisdiction. So do the deadlines for taking advantage of them.
Most require you to put the money into the qualifying 529 plan by Dec. 31. A handful, however, provide more time, typically into April of the next year.
As things get hectic during the holidays, it could be easy to overlook your state's end-of-year 529 contribution tax break deadline. You can avoid this tax turkey by putting in your planning 529 contribution well before the deadline.
Not only will that ensure you can claim the state tax benefit, it will give your child's college fund more time grow, as your relatives noted about the kiddo's size, to an impressively large size.
SavingForCollege.com has the 2022 tax year deadline details (and more) on 529 plan contributions in order to claim tax benefits in the 34 states and District of Columbia that offer such tax breaks.
Also check out the website's calculator for help determining the amount you should put into the 529.
2022's Tax Turkeys 🦃 🍗 🦃 to Avoid
Addendum, Sunday, Nov. 27, 2022: The goal of Don't Mess with Taxes is to talk turkey when it comes to tax matters. But if you're looking for some literal turkey talk, check out my November post at my tumblr tax blog, Tumbling Taxes. It includes a video of Texas turkey callers.
You also might find these items of interest:
- 6 tax-smart financial gifts for grads (and the givers)
- Tax-smart ways grandparents can help pay for college
- Tax-favored retirement saving options for freed-up student debt money
- Make paying for college a family affair, with contributions from parents, kids and Uncle Sam