Thrifty Thinking: Tax Time Tips for 529s

As you are gathering up your W2 and 1099 forms these next two months, don’t forget to think about your 529 plan in the numerical soup of tax preparation.

The College Savings Plans Network (CSPN)—the nation’s leading objective source about 529 college savings and prepaid tuition plans—offers the following tax time tips for 529 plans:

·         If you do have a 529 plan: Start gathering your paperwork. Having tax documents and other paperwork ready at tax time will help your family prove any contributions to or withdrawals from a 529 plan. The 1099-Q tax form shows all withdrawals from your 529 plan account, including rollovers to another 529 plan.  You are responsible for maintaining adequate records documenting that the funds were used for qualified education expenses or were rolled into another 529 plan.  Families with students already putting their 529s to work should receive a 1098-T from their school reporting qualified expenses paid by or on behalf of the student.  Make sure you keep receipts or check copies for any contributions so you have proof of who made contributions and when in case you need it.

·         If you don’t have a 529 plan yet: Tax time is a great time to get started. All earnings grow free of federal income tax, and contributions are tax-free when used to pay for qualified higher education expenses at any eligible college, university, community college or accredited technical training school in the US or abroad. Along with the federal tax benefits, 34 states and the District of Columbia offer state tax deductions or credits for contributing to certain 529 plans. Learn more about getting started on CSPN’s website: CollegeSavings.org.

·         When you get your refund: Reuse the refund for your 529 plan. Most people receive their tax refund within three weeks of filing their return. Instead of running to the mall for a trendy designer bag, invest the extra cash in your 529 plan. For the past two years, the average tax refund has been around $3,000– imagine the boost this would make in your college savings. Seizing the opportunity to invest what many people deem “bonus cash” could make a big dent as a loved one heads off to college.