Tax breaks grow for NC's 529 college-savings plan

With year-end tax decisions looming, be aware that the 2007 General Assembly enhanced a state income-tax deduction for contributions to North Carolina's state-sponsored 529 college savings plan.

As part of the budget bill approved in July, legislators:

• Increased the maximum annual state income-tax deduction for contributions to North Carolina's 529 plan from $2,000 to $2,500 for single filers, and from $4,000 to $5,000 for married couples filing jointly.
• Removed income limits on who is eligible for the deduction for tax years 2007-2011.
• And removed the January 1, 2011 expiration of the tax deduction.

Separate legislation that would extend the deduction to apply to contributions to all 529 college-savings plans did not win legislative approval.

 

Here is a summary of the legislation on the enhanced 529 tax deduction that was prepared by the General Assembly's Finance Legal Staff:

Section 31.19 of this (Appropriations) act makes the following three
changes to the income tax deduction for contributions made to the Parental Savings Trust Fund, created by the General Assembly last session in S.L. 2006-66:

• It removes the January 1, 2011 sunset of the deduction.
• It increases the maximum annual deduction amount allowable to an individual taxpayer for contributions to the Parental Savings Trust Fund from $2,000 to $2,500.
  In the case of a married couple filing a joint return, it increases the maximum deduction amount from $4,000 to $5,000.
• It removes the income limitations for taxable years 2007 through 2011.

The changes become effective for taxable years beginning on or after January 1, 2007. Fiscal Research estimates that the changes will reduce General Fund availability by $200,000 for FY07-08 and FY08-09.

In 1996, the General Assembly established the Parental Savings Trust Fund. The Fund is maintained by the State Education Assistance Authority, a political subdivision of the State, and is administered by the College Foundation of North Carolina as agent of the Authority. The Fund was established to enable qualified parents to save funds to meet the costs of the postsecondary education expenses of eligible students. Anyone may contribute to the Fund. Because the Fund meets the qualifications of a qualified tuition program under Section 529 of the Internal Revenue Code, distributions from the Fund are excludable from taxable income to the extent the distributions are used to pay for qualified higher education expenses. Interest earned on the Fund is also tax-exempt.

Every state offers a state Section 529 plan, and at least twenty-five states allow for a full or partial income tax deduction for contributions to the state's own plan. Last session, effective for the 2006 taxable year, the General Assembly enacted legislation that allows an individual taxpayer to deduct from the taxpayer's taxable income an amount contributed by a taxpayer to an account in the State's plan: the Parental Savings Trust Fund. The maximum amount that may be deducted by an individual in the 2006 taxable year was $750; the maximum amount for a married couple filing jointly was $1,500....

To qualify for the deduction, the adjusted gross income of the individual taxpayer or married couple filing jointly may not exceed the stated statutory amount. The income limitations of the deduction are the same income limitations a taxpayer must meet to qualify for the higher personal exemption amount and the $75 tax credit for each dependent child. This act removes the income limitation for five years: taxable years 2007 through 2011. Effective for taxable years beginning on or after January 1, 2012, an individual will not qualify for the State tax credit unless the individual's adjusted gross income falls below the statutory limitations.

The Parental Savings Trust Fund deduction must be added back to taxable income if the amount withdrawn from the Fund was not used to pay for qualified higher education expenses of the designated beneficiary. An exception is made if the withdrawal was made due to the death or permanent disability of the beneficiary.