A 529 plan is a tax-advantaged way to save for higher education expenses. In many states, taxpayers receive a state income tax benefit by making contributions to their specific plan. In addition, accounts grow and distribute income tax-free for qualified expenses.
For current and soon-to-be parents or grandparents earmarking funds for a child’s future college expenses, there are some changes you need to know prior to year-end for Oregon’s 529 plan. Oregon is now the first state in the nation to offer a refundable tax credit for 529 plan contributions. The credit replaces the current tax deduction on January 1, 2020.
For a short window of time, Oregon taxpayers can qualify for both a deduction and a credit over the next four years. To do this, a taxpayer can contribute more than the annual deduction in 2019 ($4,865 for married taxpayers filing jointly or $2,435 for individual filers) and carry forward these additional contributions.
The maximum amount to contribute to qualify for both the deduction and the credit is $24,325 for those filing jointly or $12,175 for individuals. Unlike prior years, these carry forward contributions must be made by December 31, 2019.
The plan account balance must be greater than the deduction at the end of the tax year in which the deduction is made to qualify for the carry forward.
Below is an example showing the carry forward in action. You’ll notice the potential internal rate of return showing how the deduction could benefit Oregon taxpayers.
Oregon 529 Plan: Sample Contribution
|OR Tax Rate (9.9%)||$481.64||$481.64||$481.64||$481.64||$481.64|
|Internal Rate of Return||9.9%+||9.9%||4.85%||3.2%||2.39%|
Beyond the deduction over the next four years, taxpayers can also claim up to $300 in refundable credits for joint filers or $150 for single filers. The amount a taxpayer needs to contribute to max out the full credit depends on their income. Below is an overview of how the credit is determined:
|Adjusted Gross Income (AGI)||Percentage of contributions eligible for tax credit||Contribution needed to max $150 credit (single filer)||Contribution needed to max $300 credit (joint filer)|
|Less than $30k||100%||$150 contribution||$300 contribution|
|$30,001-$70k||50%||$300 contribution||$600 contribution|
|$70,001-$100k||25%||$600 contribution||$1,200 contribution|
|$100,001-$250k||10%||$1,500 contribution||$3,000 contribution|
|>$250k||>5%||$3,000 contribution||$6,000 contribution|
Each household should make the following considerations when thinking about education contributions:
- When will the account most likely be used? Will there still be a balance in years of carry forward?
- What is the opportunity cost of utilizing the dollars to fund the account early?
- At what point is the time value of the investment less than the future tax benefits?
Karen Harris, CFP® serves as an advisor at Brighton Jones.
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