A 529 plan is a tax-advantaged savings vehicle for college or other higher education. Contributions to the plan are invested in a variety of stocks and bonds in order to achieve a better return on investment than one would get in a normal savings account. One tax advantage is that accrued dividends, interest, and price appreciation will all be free from federal and state income tax if the funds, when withdrawn, are spent solely for qualified higher education purposes. If the funds are used for other purposes, then income tax and an additional penalty may apply. Also, in New York, donors are entitled to a credit on their state income tax up to $5,000 per taxpayer for the year of contribution. More than 30 other states also provide tax credits for 529 contributions. There is no credit for federal income tax.
One recent development concerns refunds of expenses that were paid with 529 funds. For example, if a student pays tuition with 529 funds, but withdraws from school early in a semester, much of the tuition would be refunded and would be subjected to income tax upon receipt. Now however, if the refund is recontributed to the 529 plan within 60 days after receiving the refund, no tax will be due.
Another recent change provides that purchases of computers and technology for students are included as qualified higher education expenses. Technology includes computers, related peripheral equipment like printers and modems, software used for educational purposes, and internet access. This was permitted on a temporary basis beginning in 2014, but has now been made permanent.
Contact a knowledgeable attorney or tax preparer for further information.
Gary Schuster is Senior Counsel with the firm and practices Arts & Entertainment and Business Law. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.