Until recently, Minnesota was one of a few states that did not offer any tax incentives for 529 college savings plans. New legislation, passed as part of the 2017 omnibus tax bill, allows either a credit or a deduction for Minnesotans saving for college through these popular plans.
What is a 529 plan?
A 529 plan is a tax-advantaged savings account that is intended to be used for college expenses. The plans are administered by each state (including Minnesota), and a family can invest in most states' plans. Funds invested in the plan grow tax free, similar to a traditional IRA or 401K. Distributions from the plan are not taxable if used for qualified college expenses, such as tuition and books.
What is the tax incentive?
Under the new law, a Minnesota family investing in a 529 plan could be eligible for either a deduction or a credit. The credit is equal to half of the contribution for the year, with a maximum credit of $500. The credit is phased out for individuals and married couples with higher incomes. On the other hand, there are no income phaseouts for the deduction. The deduction is equal to the amount of the contribution for the year, up to $3,000 for married couples or $1,500 for individual filers. A person may claim only the credit or the deduction.
Do we have to use the Minnesota 529 plan?
No. The tax incentives are available for contributions to any qualified account. As long as the account is recognized as a 529 plan by the IRS, it qualifies for the tax incentives.
How is college savings part of our estate plan?
Planning for college - whether for children or grandchildren - can be a great way to set your loved ones up for a bright future. College savings accounts can also be used as part of your estate plan. Contributions to a 529 plan are removed from your estate and are therefore not taxable in your estate, yet you can maintain control over the account. These plans can be a good way to use annual exclusion gifts in a way other than writing a check to the beneficiary. The new state tax incentives make this an even better deal for some savers.
It's also important to remember that college students should prepare health care directives and power of attorney forms so that someone can act on their behalf if needed. See our post on Estate Planning for College Students.
Our attorneys help families and individuals implement their estate plans everyday. Contact us today if you are interested in scheduling a meeting to discuss your estate plan.
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