529 Allowable Expenses IRS: Understanding Federal and State Tax Benefits

When it comes to investing in a 529 account, understanding the federal and state tax benefits can help you make the most of your investment. In this article, we'll break down the key takeaways on allowable expenses and tax benefits for both federal and state levels.

Federal Gift Taxes

The IRS allows you to contribute up to $90,000 (or $180,000 for married couples) to a 529 account in a single year, with the option to have it treated as if you had given it over a five-year period for tax purposes. Additionally, the first $18,000 ($36,000 for married couples filing jointly) given to each beneficiary each year is excluded from federal gift taxes.

Five-Year Gift Tax Averaging

A special provision in the IRS code allows you to use five-year gift tax averaging when contributing to a 529 plan. This means that contributions above the annual exclusion amount can be spread out over five years for tax purposes, reducing the impact of federal gift taxes.

State Tax Benefits

New Mexico residents have it even better! Contributions to The Education Plan, New Mexico's official 529 plan, are deductible from state taxable income each year, making it one of only four states in the nation to provide an unlimited state tax deduction. This means that you will pay no state income taxes on your account growth or withdrawals for qualified education expenses.

Federal Tax Benefits

Earnings on your 529 account and withdrawals from it are not subject to federal taxes when used for qualified educational expenses, including tuition, room and board, books, and more. This is a significant benefit, as you won't have to pay federal income taxes on your investment gains or withdrawals.

Understanding the allowable expenses and tax benefits of a 529 plan can help you make informed decisions about your investment. By taking advantage of the federal and state tax benefits, you can save thousands of dollars in taxes over time, ultimately growing your wealth for education expenses. Consult with a tax advisor to determine how these benefits apply to your specific situation and explore the options available through The Education Plan.

Key Takeaways:

* Federal gift taxes: up to $90,000 (or $180,000 for married couples) can be contributed in a single year, with option to have it treated as if given over five years

* Annual exclusion amount: $18,000 ($36,000 for married couples filing jointly)

* Five-year gift tax averaging: contributions above annual exclusion amount can be spread out over five years for tax purposes

* State tax benefits:

+ New Mexico residents: unlimited state tax deduction on contributions to The Education Plan

+ Non-New Mexico residents: no state tax deduction on contributions to other states' 529 plans

* Federal tax benefits:

+ Earnings and withdrawals not subject to federal taxes when used for qualified educational expenses.

529 allowable expenses irs