“When I went to college” – my kids love when I say that - I could work during the summer to pay the tuition. I was a lifeguard, sold shoes at a now defunct sporting goods store, and eventually enrolled in the National Guard for the tuition reimbursement. It was a lot, but as my dad said “it builds character” – not sure I was looking for character at 18, but I did graduate without any student loans.
But times have changed, and tuition is absurdly high. For that reason, I started saving early in the 529 college savings plan for all three kids. The 529 college savings plan has many benefits for those wanting to save for college, but today I’ll focus on our Connecticut state tax deduction because it’s important to know how it works, after all it can help you save even more money!
First understand you can use any state’s 529 college savings plan. But if you pay Connecticut state income taxes you might want to check out our home state’s 529 plan, because it could come with a nice little tax break. Here’s how it works:
Connecticut 529 Tax Break
If you file CT taxes – your contributions are deductible for Connecticut income tax purposes up to $5,000 per year for a single return or $10,000 per year for a joint return. That means if you contribute $7k this year to your child’s CT 529 and you file CT state income taxes, then you get to deduct $7k from your income for Connecticut state income taxes for the year. If you exceed the $10k amount, you can carry over the excess amount for the 5 taxable years following the deduction. A married couple contributing $17k this year means they can only use $10k as a deduction and the remaining $7k can be used the next year or carried forward up to 5 years (See Connecticut’s website for more information).
Other important things to know about the CT 529 tax break
It’s important to note that the $10k cap is per household, not per beneficiary. If you contribute $10k to each of three kids, for a total of $30k, only $10k can be deducted from your income in that year, the balance - $20k – is carried forward to the next year.
How valuable is the Connecticut 529 tax deduction?
How valuable is the CT state deduction? It’s usually not much, but it’s something. Vanguard has a nice calculator that can help. Using the calculator, a married couple earning $250k and contributing $10k to a Connecticut 529 will save about $600 on their state return1. This is a hypothetical example, actual results will vary. Of course this is an oversimplified back of the envelope calculation, there is much more that could go into the calculation. You should really talk to your accountant or tax advisor for a better calculation. However, these basic calculators are a start.
Summary
All in all, I am a fan of 529 plans for college savers. There are many benefits like tax-deferral and tax-free distributions for qualified education expenses. The Connecticut state tax break is a bonus. Does this mean the CT 529 plan is right for you? That’s something you’ll need to talk to your financial advisor about. After all there are many ways to save for college and there are dozens of 529 plans available, you don’t have to use your home state. I prefer 529 plans with above-average mutual fund performance and a competitive fee structure, that can really make a difference over time.
For more information, please email me at maloi@sfr1.com
1. For illustrative purposes only, actual results can vary. Please speak to a tax or financial professional.