This is going to be part of a series of articles I’m writing on deductions specific to our Ohio taxpayers. As you read this, you may want to pull out your last years’ tax returns to see if your tax preparer remembered to claim this (and other deductions) for you. We are happy to amend your tax return, and it is less expensive to amend a state return only.
A little background: 529 plans are college savings plans set up by the federal government in 1996. The earnings in the plan grow tax-free. Interest earned within the plan does not count as taxable income when you file your taxes. Also, when your student takes a distribution to cover educational costs, any qualified distributions are not taxable (unlike your deferred 401(k) savings!). In this context, “qualified” expenses mean any cost that is required of a higher education student. Tuition, books, room and board for full-time students, fees, computer equipment, trade tools, student loan repayment, even room and board for off-campus students and groceries (non-taxable) are qualified to be paid for by distributions of the 529 plan.
Ohio residents with an Ohio’s 529 Plan, there’s an additional tax advantage. Ohioans can deduct their Ohio 529 contributions from their Ohio taxable income, up to $4,000 per year, per beneficiary, with unlimited carry forward. In other words, an Ohio resident can take up to a $4,000 deduction from their state income taxes for contributions to each Ohio 529 plan with a different beneficiary. For example, if an Ohio account owner has three Ohio 529 plans for three children and contributes $4,000 annually to each beneficiary, they can maximize this tax benefit up to $12,000 per year. The unlimited carry forward for the state income tax deduction means that $4,000 per year is not a contribution cap. The taxpayer can continue to subtract $4,000 per year, per beneficiary, from their Ohio taxable income until all the Ohio 529 Plan contributions have been deducted.
Furthermore, Ohio is one of the few states that also allows Grandparents to contribute to the 529 Plan and take up to $4000 tax deduction for Ohio state taxes. Remember, the contribution is not limited to $4000, and any excess deduction can be carried forward indefinitely.
There are other factors to help build up your 529 plan as well as the tax benefits. Compound interest is a major source of growth for any savings program. For a 529 college savings plan, the compound interest is accrued not just on the original contribution but on every contribution. Compound interest is also added to the 529 investment options earnings and the already accumulated interest.
If you are interested in finding out more tax strategies for filing in Ohio, please stay tuned to my blog and we will explore Survivor’s Benefits plans soon!
Until then, we are in the middle of tax season, and are building our client base. We would love to have an in-person or virtual appointment with YOU! If you’d like to chat with me live, go to our online booking page, and enjoy a free, no-obligation 30 minute appointment to discuss your tax situation.