Introduction To 529 Plans Tax Advantages
All of us think about the education of our children. If it is possible to get some tax benefits while you are at it, what can be better? There are several 529 plans tax advantages which make them the best choice for anyone.
529 plans are tax advantaged plans. They carry the number 529 because the provision for these plans is made in the Section 529 of the Internal Revenue Code of the United States. They are available to all bona fide citizens of the Unite States. The aim behind the introduction of 529 plans was to create advantage for people who saved money for the higher education of their children.
The 529 plans tax advantages are much more lucrative in comparison to other tax planning schemes available. All the money that you earn on your investment in the 529 plans is free from any Federal income tax. In some cases these is no state income tax applicable either. The withdrawals must be made for college education and related expenses like fees of the college and boarding, lodging charges etc.
Please note that if you make withdrawal from any 529 plan for non educational purpose, these 529 plans tax advantages would not be available to you. Not only would you have to pay the federal and state income taxes, but Uncle Sam would also make you pay 10% extra as a federal tax penalty. These restrictions were necessary so that people do not start using the 529 plans as tax planning measures instead of actually saving the money for the education of their children. One more thing to be keep in consideration here is that the federal income tax exemptions on the withdrawals made from 529 plans are only applicable until December 31, 2007. All subsequent withdrawals would be taxed like other incomes unless the president and Congress of the United States decide to bring legislation for extension of this tax holiday. Coming to the 529 plans tax advantages in the cases of state taxes, you should note that not all states provide all the tax advantages. There are 50 states in US. Of these only 20 states provide tax advantages on the contributions made towards 529 plans. That too only if the plan is state sponsored. Take the example of Missouri. If you pay any amount up to a maximum of $8000 towards 529 plans you get a tax deduction of that much amount on the Missouri state income tax. Similarly some states also provide tax exemptions on the withdrawals that you make from 529 plans. There are a number of 529 plans tax advantages. For more details please contact your tax attorney.
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