As of 2018, we have been forced onto a SALT free diet. Where once my wife and I were able to deduct state and local taxes on our federal return, we no longer can. We are limited to a $10,000 deduction for SALT. This doesn’t even begin to cover our formerly deductible property taxes and state income taxes. Small compensation it is, but enter the 529 plan.
The 529 allowed us to save for our children’s education by contributing to an account whose gains and income accrued tax free. Upon redemption, we were able to pay educational and related expenses without triggering a tax bill. This was a great deal. Unfortunately, we exhausted our children’s accounts in paying for college. So what do you do if you still have to or want to help your children as they continue their education?
We have had one child go to business school and another about to enter law school. We don’t want to expose our contributions to market risk. They are going to be withdrawn to pay tuition tomorrow. So, why bother with the 529? Tax deductions!
You can contribute the funds and withdraw them almost immediately, effectively using the 529 as a pass through. This qualifies you for the state tax deduction while avoiding market exposure. It’s still a low SALT diet, but it’s better than nothing. There is no federal deduction for 529 contributions, but many states allow for it. A $10,000 joint contribution in New York, where we live, is worth over $650 to most couples and half that to individuals. Speaking of individuals, our children, who worked prior to attending grad school, have made tax deductible contributions for themselves.
While 529 plans are close to an unalloyed good, the contribution strategy only works in states that allow you to deduct plan contributions from your state income tax. As with pumping your own gas, this doesn’t work in New Jersey. Suffice to say that you should talk with your advisor, as your state’s laws and tax treatment of this may differ.