September 15, 2010

Tax-favored Section 529 college savings plans have been popular in New York state for many years.

The 529 college savings plan starts to look even better when tax rates are on the way up as all of the income and capital gains earned within the the plan grow tax free, as long as the proceeds are ultimately used for educational expenses. For a married couple $10,000 per year can be deducted on your NYS tax return. They can also give a child up to $130,000 in a single year without a need for filing a gift tax return. Qualified withdrawals from a NYS plan are always federal and NYS income-tax-free.

For any year when a 529 withdrawal is taken, the plan must issue a Form 1099-Q (Payments From Qualified Education Programs) by Feb. 1 of the following year. Withdrawn earnings are always tax free when total withdrawals for the year don't exceed the account beneficiary's adjusted qualified education expenses. Adjusted education expenses equal tuition and related fees, plus room and board, plus books and supplies, plus computer and Internet access costs; minus costs covered by Pell grants; minus costs covered by tax-free scholarships, fellowships, and tuition discounts; minus any costs used to claim the American Opportunity or Lifetime Learning tax credit; and minus any costs used to claim the deduction for tuition and fees. This gets a bit complicated......

If withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. It is a good idea to seek expert advice when moving money into or out of a 529.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).