December 2021 – 529 College Funds – An Update
529 COLLEGE FUNDS – AN UPDATE
State Legislation Update as of January 1, 2022:
The state of Colorado passed legislation on the 529 contribution deduction starting January 1, 2022. This new legislation caps the 529 contribution deduction to $20,000 (single filer) per beneficiary and $30,000 (joint filer) per beneficiary.
Please note that individuals can still contribute more than these amounts to their 529 accounts. However, they will only be able to deduct amounts at or below the deduction cap starting in 2022.
For 2021, please be advised that there is no cap on the 529 deduction. The $20,000/$30,000 limitation will go into effect for the 2022 tax year.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to assist and encourage individuals in saving for future education costs for themselves or their beneficiaries. These plans are sponsored by states or educational institutions and are backed by Section 529 of the Internal Revenue Code. Earnings can grow tax-free if the distributions are used for qualified educational purposes
Who Can Open a 529 Plan?
Anyone can open and fund a 529 plan – students, parents, grandparents, or other friends and relatives.
Looking at the contributor’s perspective, taxpayers can set up 529 accounts and contribute to the plans. Even if a contributor does not own the plan, they are entitled to the Colorado tax deduction. At the end of the year, the contributor is able to treat up to $20,000 (single filer) or $30,000 (joint filer) as a state tax deduction in Colorado (these amounts are applicable starting in 2022, there is not a deduction limit for the remainder of 2021). This deduction has the potential to generate substantial tax savings.
Please also note that if an individual contributes over $15,000 to a beneficiary, the individual will need to consider gift tax return requirements and potentially file a gift tax return. Section 529 plans offer a special gifting tool. A lump-sum contribution can be made to a 529 plan of up to five times the annual gift tax exclusion ($75,000 for single filer and $150,000 for joint filer in 2021) with an election to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.
From the beneficiary’s perspective, a taxpayer’s child or designated beneficiary can utilize the 529 account for assistance as they attend school. The 529 fund can be used towards a wide range of educational expenses including elementary, middle, and high school as well as college (Note: funds used for schooling below the college level are not eligible for the tax deduction for Colorado). Additionally, if the funds are properly used for qualified expenses (detailed below), the distributions, including earnings, to that beneficiary are tax-free.
Rules & Tax Considerations
The rules around 529 distributions make a clear distinction between educational and non-educational use.
Educational use: if 529 funds are used to pay for qualified expenses, no federal income taxes are owed on the withdrawals or the earnings. Qualified expenses include tuition, fees, room & board (student must be enrolled at least half-time), and other related enrollment expenses at an education institution. These could include items like textbooks, housing, groceries, and computers/related equipment used for school.
Non-educational use: if 529 funds are used to pay for items outside of the range of qualified expenses, a 10% penalty will be assessed on the amounts used and ordinary income tax will also be assessed on the distributions and earnings.
Employee Spotlight: Brandi Goings
Brandi has been with the Soukup, Bush & Associates team since January 2020. She grew up in Fort Collins and graduated from Colorado State University in the fall of 2016, with a B.A. in Economics. She currently assists with all aspects of administrative management as well as processing both individual and business income tax returns. In addition, she helps with overseeing IT operations for the firm.
In her spare time, Brandi enjoys spending time with her husband, Bryan. They love hanging out with their dog, being outside, cooking, and working on endless house projects.