Contributions to Section 529 College Savings Plans - Tax Benefits

What is the general purpose of a 529 plan?

Qualified Tuition Programs, otherwise known as Section 529 Plans, are education savings plans operated by a state or educational institution.  They are designed to help families set aside funds for future college costs.  Although these accounts are generally set up for ones children or grandchildren, the beneficiary can be anyone.

What are the federal tax benefits of a Section 529 plan? Are Section 529 contributions deductible?

No federal deduction is allowed for contributions to a Qualified Tuition Program account; however, qualifying distributions from the account will be tax fee.  This means that all of the growth and earnings in the account are tax free provided that the proceeds are used for qualifying education expenses of the account beneficiary.

What are the Oregon tax benefits of a Section 529 plan?

You can subtract contributions you made to an Oregon 529 College Savings Network account during the tax year up to $4,455 on a joint tax return or up to $2,225 for all other filing statuses (single, head of household, or married filing separate). Each state has a plan or plans that they specifically sponsor.   To qualify for the subtraction the contributions must be made to the Oregon plan and not one of the plans sponsored by another state.  

How much can be contributed annually to a Section 529 plan?

The overall limitation on contributions is the amount necessary to provide for the qualified expenses of the beneficiary.  There is no AGI limitation as there is with so many other provisions of the tax code.  Contributions are considered a gift so you are subject to the gift limitation rules. Currently the maximum gift exclusion is $14,000 per year.  You can elect to make a larger contribution in a given year and account for it ratably over the next 5 years.  For example, one could contribute $70,000 to their grandchild's 529 plan in 2013 and apply the the gift tax limit for the next 5 years (5 x $14,000 = $70,000).  No other gifts or contributions could be made to that grandchild during the 5 year period without triggering gift tax issues.

When do I need to make my Section 529 plan contribution?

Because there is no deduction for this item on the federal return, the timing of the contribution is not particularly important for federal purposes.  However, to receive a subtraction on the Oregon return, the contribution must be made by the due date of your tax return including extensions.

Oregon also has a carryforward provision.  If you make a contribution that is greater than the maximum deduction allowed for a particular year, you may carry forward the excess and and deduct it over the next 4 years.

How are distributions from a Section 529 plan treated?

Distributions from a qualified tuition program (529 plan) are excluded from income if the proceeds are used for qualified higher education expenses.  If the proceeds are not used for qualified education expenses the earnings portion of the distribution will be subject to tax and most likely a 10% penalty on top of that.  (Some exceptions apply to the application of this penalty such as the death or disability of the beneficiary.)

What are qualifying education expenses?

Qualified higher education expenses include:

• Tuition, fees, books, supplies and equipment required for attending an eligible school.
• Reasonable costs of room and board for those who are at least 1/2 time students in a degree program.
• expenses of a special needs beneficiary with a physical, mental or emotional condition that requires additional time to complete his/her education.

What if the beneficiary isn't going to college?  Can we transfer the Section 529 funds to a different beneficiary?

Yes. There are no tax consequences if the account balance is rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 plan of one of your children into a sibling's plan without penalty.  Nor is there any tax consequence to changing the designated beneficiary to a qualifying member of the beneficiaries family.   You may change the beneficiary or roll the account balance over to the following:

1.      Spouse of the beneficiary

2.      Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

3.      Brother, sister, stepbrother, or stepsister.

4.      Father or mother or ancestor of either.

5.      Stepfather or stepmother.

6.      Son or daughter of a brother or sister.

7.      Brother or sister of father or mother.

8.      Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

9.      The spouse of any individual listed above.

10.    First cousin.