Tax Advantages & Benefits of 529 Plans

Tax Advantages & Benefits of 529 Plans

Maryland 529 offers great tax benefits.

A unique Maryland State income deduction for Maryland taxpayers.

There’s no question that saving for your children’s future education with a 529 college savings plan can help give them a real advantage. But, they’re not the only ones who can benefit from your smart decision. You can too!

Did you know?

Maryland 529 college savings plans are the only 529 plans that offer a Maryland State income deduction each year for your payments or contributions to the plans.

Here’s how it works:
Maryland Prepaid College Trust

If you are the account holder or a contributor, you can deduct up to $2,500 of payments each year from your Maryland State income per account - $5,000 for two, $7,500 for three, etc. Payments in excess of $2,500 per account can be deducted in future years until the full amount of payments has been deducted.

For example: If you purchase a 2-year University Plan for your child for a lump sum of $21,000, you can deduct $2,500 per tax year for each of Years 1 through 8. Over time, that adds up to a total of $20,000!  You can then deduct the remaining $1,000 of your payment in Year 9.

Maryland College Investment Plan

If you are the account holder or a contributor, you may deduct up to $2,500 of contributions each year from your Maryland State income per beneficiary - $5,000 for two, $7,500 for three, etc. However, you cannot deduct more than $2,500 per beneficiary per year. Contributions totaling more than $2,500 per beneficiary may be deducted for up to the next 10 years.

For example: If you contribute $27,500 in Year 1 to the College Investment Plan for your child, you may deduct $2,500 per tax year for each of Years 1 through 11 (11 x $2,500 = $27,500). If you also contribute $27,500 in Year 1 to one or more Investment Portfolios for another child, you may deduct an additional $2,500 per tax year for each of Years 1 through 11, for a total deduction of $5,000 per tax year from Maryland adjusted gross income.

View our Maryland Tax Benefit Infographic to see an example of how you could maximize your State income deduction.

Taking Your Deduction

To take advantage of your State income deduction for a particular year, just mail or complete your payment or contribution online by December 31 of that year. Remember to keep detailed records for the timing of your contributions for tax reporting purposes.

Some important things to remember:
  • Residency matters. If you no longer pay Maryland income tax, you will no longer receive the Maryland income deduction. Check with your new state of residence about its state tax benefits, available for your 529 plan investment.
  • Deductions are for account holders and contributors. Other individuals may make contributions to an account, and may take the annual deduction on the amounts he or she contributed.

 

Opportunity for tax-free earnings

Did you know that – like all 529 college savings plans – your investment can grow tax-deferred?

Tax-deferred growth while your funds are invested
  • College Investment Plan: Any earnings on your contributions are tax-deferred at the federal and Maryland state level.
  • Prepaid College Trust: You pay no taxes while your funds are invested, since earnings are not calculated until you either use your account for tuition Benefits or request a transfer or refund.
Tax-free earnings when funds are used for Qualified Higher Education Expenses

Maryland 529 cannot and does not provide tax advice. Your tax consequences depend on your individual circumstances. If you withdraw funds that are not used for Qualified Higher Education Expenses, any earnings on that distribution may be subject to income taxes and a 10% federal penalty. In addition, there may be Maryland tax consequences for your contributions. State tax laws and treatment may vary. So, check with your tax advisor regarding your specific situation.

Even more tax benefits!

Assets in Maryland 529 accounts have estate planning and tax benefits
  • Funds contributed to our plans, while considered completed gifts for tax purposes, are eligible for federal gift tax exclusions.
  • Like all 529 college savings plans, Maryland 529 plans allow for contributions or payments that qualify for special 5-year averaging if a proper election is made.

For example: For the 2018 tax year, if the amounts contributed by you for your Beneficiary together with any other gifts to that person (over and above those made to your Account) do not exceed $15,000 ($30,000 for married couples making a proper election), no gift tax will be imposed for the year. Gifts of up to $75,000 can be made in 2018 ($150,000 for married couples making a proper election) for a Beneficiary and averaged out over five years for the gift tax exclusion. The ability to average a $75,000 gift over five years is a benefit that is unique to 529 plans.

This allows you to move assets into tax-deferred investments and out of your estate more quickly. However, you should read the Certain Federal Tax Considerations sections of our plan disclosure statement for further important information. In addition, you should consult with a tax or estate-planning advisor and research more information on estate planning before investing.

Additional Resources

Check out the resources below to learn more about the federal and Maryland tax benefits of Maryland 529:

  • Review the Certain Federal Tax Considerations and Certain State Tax Considerations of each of our plans.
  • For Maryland tax information, visit www.marylandtaxes.com or call 1-800-MD-TAXES.
  • For federal tax information, visit IRS.gov and review IRS Publication 970.

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