Getting educated solely from the School of Hard Knocks or the University of Life is something Uncle Sam would like to help us avoid. To that end we have 529 plans and other education tax benefits. What are they? Simply put, a 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses. Also known as qualified tuition programs, funds contributed to them can be used to pay for college, K-12 tuition, apprenticeship programs and even student loan repayments in addition to other expenses as defined in the code.
529 plans are funded using after-tax contributions to a qualified account sponsored by states, state agencies or educational institutions. Earnings on funds invested in such accounts are tax free and there is no tax upon withdrawal when used for qualified expenses. There are no annual 529 plan contributions limits. However, contributions are considered completed gifts to the beneficiary so the annual gift tax exclusion and the lifetime estate exemption should be considered.
Many states, including Arizona, will give you an additional tax benefit. In Arizona, in addition to the 529 account earnings being tax free, you can take a deduction on your state income tax return for your 529 contributions. Up until recently, the Arizona deduction was limited to $2,000 for single individuals and $4,000 for married couples filing jointly. However effective September 29, 2021, for tax year 2021 and after, the deduction is increased to $4,000 per beneficiary for married couples filing jointly and $2,000 per beneficiary for single individuals. There is NO LIMIT on the number of beneficiaries Arizona residents can make contributions to in a tax year.
If you have any questions on education tax benefits, contact us today for more information.
Dale F. Jensen, CPA