Post by Admin/YBB on Feb 26, 2023 19:53:24 GMT -6
State Tax Benefits of 529 & Whether Contributions Are Gross or Net
A poster on FIC noted that TurboTax was netting MI529 contributions and withdrawals. A discussion ensued and YBB found that only MI529 and MN529 do this netting. Specifically, IL529 treats contributions and withdrawals without any connection. So, in several states, a loophole is to contribute to 529, get state tax deduction and soon withdraw the money for college expenses - sort of flowing $s through 529 for a quick state tax deduction; MI and MN disallow this. Also note that only a few states have state tax benefits for 529s and their rules vary a lot.
The full post from FIC follows.
Confusion about MI 529 Tax Calculation
yogibearbull (2/26/23 YBB)
@szhic19 , thanks for the excerpts from MI 529 rules.
For IL 529, I never heard of this netting of contributions & withdrawals. I just searched the IL 529 program document for any related rules. There are lots of rules for each, but none connecting them for netting.
This looks like a state level 529 variation.
I will keep searching for more. I am now curious which states have this restriction.
Knowing the rule, justification can be provided. I thought that the beneficiary got the benefit from qualified withdrawal, and the owner got the benefit from contributions, so IL 529 rule (of NOT netting) made sense to me.
Edit/Add: That was quick and easy. www.savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-wort...
"Taxpayers can contribute to a 529 plan, immediately tax a qualified distribution to pay for college or K-12 tuition, and qualify for the state income tax benefit. However, Montana and Wisconsin block this state tax deduction loophole by imposing time limits, and Michigan and Minnesota base state income tax benefit on annual contributions net of distributions."
See also www.savingforcollege.com/article/529-plan-state-tax-deduction-loophole
"In a bit of magic, you can even take advantage of the 529 tax deduction loophole after the fact, with the distribution coming after the expenses, so long as both events occur within the same tax year. The distribution must also occur within a reasonable amount of time after the expenses.
Exceptions to the loophole
Two states, Michigan and Minnesota, block the loophole by basing the state income tax deduction or tax credit on annual contributions net of distributions."
A poster on FIC noted that TurboTax was netting MI529 contributions and withdrawals. A discussion ensued and YBB found that only MI529 and MN529 do this netting. Specifically, IL529 treats contributions and withdrawals without any connection. So, in several states, a loophole is to contribute to 529, get state tax deduction and soon withdraw the money for college expenses - sort of flowing $s through 529 for a quick state tax deduction; MI and MN disallow this. Also note that only a few states have state tax benefits for 529s and their rules vary a lot.
The full post from FIC follows.
Confusion about MI 529 Tax Calculation
yogibearbull (2/26/23 YBB)
@szhic19 , thanks for the excerpts from MI 529 rules.
For IL 529, I never heard of this netting of contributions & withdrawals. I just searched the IL 529 program document for any related rules. There are lots of rules for each, but none connecting them for netting.
This looks like a state level 529 variation.
I will keep searching for more. I am now curious which states have this restriction.
Knowing the rule, justification can be provided. I thought that the beneficiary got the benefit from qualified withdrawal, and the owner got the benefit from contributions, so IL 529 rule (of NOT netting) made sense to me.
Edit/Add: That was quick and easy. www.savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-wort...
"Taxpayers can contribute to a 529 plan, immediately tax a qualified distribution to pay for college or K-12 tuition, and qualify for the state income tax benefit. However, Montana and Wisconsin block this state tax deduction loophole by imposing time limits, and Michigan and Minnesota base state income tax benefit on annual contributions net of distributions."
See also www.savingforcollege.com/article/529-plan-state-tax-deduction-loophole
"In a bit of magic, you can even take advantage of the 529 tax deduction loophole after the fact, with the distribution coming after the expenses, so long as both events occur within the same tax year. The distribution must also occur within a reasonable amount of time after the expenses.
Exceptions to the loophole
Two states, Michigan and Minnesota, block the loophole by basing the state income tax deduction or tax credit on annual contributions net of distributions."