Tax Strategies for Funding Higher Education
Parents typically use 529 accounts to cover the costs of paying for their children’s college. The advantages are that contributions grow tax-deferred and withdrawals are tax-free, as long as the funds are used for qualified educational expenses such as tuition, fees, books, supplies and computers.1 Also, recent tax law changes have expanded the rules to include up to $10,000 in distributions from a 529 plan toward K-12 tuition per year, per beneficiary.2
Tax Strategies for 529 Plans3,4
For high-net-worth individuals with college kids, 529s represent an additional advantage — lowering potential income and estate tax liabilities — which is helpful in light of recent tax law changes. Those changes include significantly reducing how much high-wage earners can deduct for state and local taxes (SALT), as well as for property taxes. You may be able to receive a state income tax deduction for 529 contributions as noted below, but there is no federal income tax deduction.
Potential State Tax Deductions3
When it comes to 529 plans, 34 states allow for a state tax deduction for funding them, but most put a cap on how much can be deducted. Some states offer higher deductions than others. For example, New York residents can deduct $5,000 (single) and $10,000 (married filing jointly) for 529 contributions. But in Georgia, those residents can only deduct $2,000 (single) and $4,000 (married filing jointly) per beneficiary. For 12 of the 34 states, the amount you are unable to deduct will roll over for future years. In just four states — Colorado, New Mexico, South Carolina and West Virginia — you can fully deduct your annual 529 contributions from your state taxable income, giving you a significant tax advantage.
Gift Tax Exclusion5
While you can contribute any amount annually to a 529 plan, contributions are considered gifts for tax purposes, which means to qualify for the annual gift tax exclusion in 2019, individuals can contribute up to $15,000 and married couples filing jointly can contribute $30,000. So, for example, if you have three grandchildren, you could jointly give $90,000 without triggering the gift tax. Keep in mind that the annual gift tax exclusion includes non-529 gifts, such as cash or property, so plan accordingly. An individual’s lifetime estate and gift tax exemption maximum is $11.4 million without having to pay federal estate or gift tax. In addition, there is no joint gift tax return, so you and your spouse would each have to file a return. Also, you can contribute any amount above the annual limits noted ($15,000/$30,000), but you’ll have to report those contributions to the IRS, and the amount will count against your $11.4 million individual exemption.
Frontloading Your 529 Plan3
One way to protect a larger amount from estate taxes is to frontload a 529 account to fund a beneficiary’s education. Individuals can “frontload” a 529 with the equivalent of five years of annual exclusion gifts. In 2019, that would equal as much as $75,000 from an individual or $150,000 from a married couple. This can help high-wage earners limit their income tax liability in a single year. If you choose to frontload an account, you will need to file a gift tax return and make no additional annual exclusion gifts for five years.
While a 529 is typically funded by a parent or grandparent, anyone can open an account for nearly any child, even if the child is not a family member. Most plans, regardless of which state, are open to anyone to invest in, although residents in the states mentioned above receive a tax deduction if they invest in their state’s plan.
Plan for Your Future
Whether you just had a child, or your child is getting ready to go off to K-12 school or college, a 529 plan is a tax-deferred investment vehicle that can give high-net-worth individuals a way to lower their income and estate tax liabilities. Your team at Mariner Wealth Advisors can help you develop a strategy to save for educational expenses as part of a comprehensive wealth management plan.
1“Avoid These 529 Withdrawal Traps,” savingforcollege.com.
2“IRS Offers Guidance on Recent 529 Education Savings Plan Changes,” irs.gov.
3“How High Earners Are Maximizing This Unique Tax Loophole for Education Funding,” forbes.com.
4“6 Facts Every Parent Should Know About 529 Plan Tax Deductions,” studentloanhero.com.
5“How Much Can You Contribute to a 529 Plan in 2019?” savingforcollege.com.
6“The 10 Most Frequently Asked 529 Questions,” money.cnn.com.
This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisors’ investment advisory services and general economic market conditions. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. Any opinions and forecasts contained herein are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. You should note that the materials are provided “as is” without any express or implied warranties. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing.
The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass.
Mariner Wealth Advisors (“MWA”), is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training. MWA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website. Please read the disclosure statement carefully before you invest or send money.