Remind clients of 529 plan contribution deadlines
Key takeaways
May reduce state income taxes
Don’t let clients miss out on state tax benefits. Make sure they contribute to a 529 plan by December 31.
Check state rules
Know contribution rules for state tax breaks. If client’s have multiple 529 plans from different states, check those too.
Gift an education
Remind clients to contribute up to the annual $17,000 gift tax exclusion to a 529 plan by December 31.
The end of the year is near. Along with holiday festivities are some important deadlines for contributions to a 529 college savings plan. There isn’t a yearly deadline for contributing to one, and clients can make a contribution whenever they want. If their state offers tax benefits, then they do need to make contributions by December 31st to get it for that year.
Meet the deadline to potentially reduce state income taxes
Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for contributions to a 529 plan. (Contributions are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to the in-state 529 plan can get a state income tax deduction. They don’t need to be the plan account owner. Nine states give the tax benefit for contributions to any 529 plan, and it doesn’t need to be sponsored by the state. For example, if a client lives in Arizona but contribute to a New York-sponsored 529 plan where their grandchild lives, they can claim their contributions on their Arizona state tax return. In 10 states, however, only the plan account owner can claim a tax benefit. See your state tax benefits.
The contribution deadline to get the current year's state income tax breaks for most states that offer one is December 31. Six states have contribution deadlines the following April, the same as the state and IRS tax-filing deadlines.
Most states that offer tax benefits limit the 529 plan contribution amount that’s eligible for a state income tax break. Some states allow taxpayers to carry forward excess contributions or unused tax deductions or credits and claim them in future tax years. This is good for those who don’t contribute the full state tax-advantaged amount in the year.
Gift of an education
A client doesn’t need to be a parent or other relative to save for and contribute to a child’s education. Anyone can open a 529 college savings plan for a child. Contributions are considered gifts for tax purposes and may qualify for the annual gift-tax exclusion. For 2023, individuals may gift up to $17,000 ($34,000 if married) per beneficiary without incurring gift taxes or affecting their lifetime gift tax exemption amount, which is $12.92 million in 2023. Grandparents, aunts, uncles, and family friends looking to reduce exposure to estate tax use 529 plan contributions as part of an estate planning strategy. Remind clients that to qualify for the 2023 gift-tax exclusion, the 529 plan contribution must be made by December 31.
A special provision allows a person to use accelerated gifting, making five years of contributions (the current year plus four future years) in a single year.1 So, a client can contribute $85,000 and a married couple $170,000 to a 529 plan in 2023. They can gift to as many people as they want in a year, so they can superfund a 529 college savings plan for as many children as you want. Again, remind them that this must be done by December 31 to get the credit for 2023.
Easy way to gift
If people are asking your clients about gift ideas this holiday season, they might want to suggest contributing to a 529 savings plan for a child. Friends, family members, employers, and anyone else who wants to can contribute to a CollegeBound 529 plan using Ugift®. For each beneficiary, 529 plan owners receive a unique Ugift® code. They can share this code with others who wish to contribute to the account at Ugift529.com. Ugift® has an easy solution for those who may be uncomfortable asking for a contribution. Polite requests can be made via Ugift’s email or with a Facebook or Twitter account.
Learn more about Ugift®.
Remind your clients about potential tax benefits
Make sure clients don’t miss out on potential tax benefits. Keep the December 31 deadline in mind, and be sure they make 529 plan contributions before then.
Send them the client version of this article, Contribute to a child’s education. Get more ways to help guide clients with our resources about 529 college savings plans.
Footnotes
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1
The gift-tax exclusion applies, provided the 529 account owner makes no other gifts to the beneficiary during a five-year period. Contributions between $17,000 and $85,000 ($34,000 and $170,000 for married couples filing jointly) made in one year may be prorated over a five-year period without subjecting the donor(s) to federal gift tax or reducing his/her federal unified estate and gift tax credit. If an individual contributes less than the $85,000 maximum ($170,000 for married couples filing jointly), additional contributions may be made without subjecting the donor to federal gift tax up to a prorated level of $17,000 ($34,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. If the account owner dies before the end of the five-year period, a prorated portion of contributions between $17,000 and $85,000 ($34,000 and $170,000 for married couples filing jointly) made in one year may be included in his or her estate for estate tax purposes. Please consult your tax and/or legal advisor for further guidance.
