Understanding the Tax Advantages of Nebraska's 529 Plan

In today's complex tax landscape, many taxpayers find themselves taking the standard deduction rather than itemizing. This shift can effectively increase the cost of your state and local taxes. As a result, Nebraska residents may want to explore strategies to reduce their state income tax burden. One powerful tool to consider is Nebraska's 529 College Savings Plan. But how exactly can this help you manage your tax obligations? 

What Are 529 Plans? 

A 529 plan is designed to help people save for their children's college expenses. It is a tax-advantaged plan, allowing you to reduce your tax burden. Individuals place money into these accounts each year, so the funds are available when it is time for college. As long as the funds are correctly used, the earnings are not taxed.  

These plans also allow funds to be used for K-12 education. That means up to $10,000 per year, per student, can be used for private school tuition and still qualify for tax-free withdrawal for federal income tax purposes.  It is important to note that Nebraska treats these withdrawals as non-qualified.  

What Does the Nebraska 529 College Savings Plan Offer? 

The Nebraska College Savings Plan enables residents to contribute money towards their NEST accounts and receive a Nebraska income tax deduction for the contribution amount of up to $10,000 ($5,000 for single filers). Contributions to any other state's 529 plan are not deductible for Nebraska taxes. 

Key Benefits 

One of the primary advantages of Nebraska's 529 college savings plans is the generous tax benefits they offer. These tax incentives make 529 plans compelling for families looking to maximize their college savings. Here are the key benefits: 

1. State Tax Deductions 

Nebraska residents who contribute to a 529 plan sponsored by the state can deduct up to $10,000 ($5,000 if married, filing separately) from their state taxable income. This substantial tax benefit can significantly enhance the growth of your college savings over time. 

2. Tax-Deferred Growth 

Contributions to a Nebraska 529 plan grow tax-deferred, meaning your money can compound without being subject to annual taxation. This allows your savings to accumulate more quickly, as the entire balance works for you rather than being diminished by taxes. 

3. Tax-Free Withdrawals 

When it's time to use the funds for qualified educational expenses, such as tuition, fees, books, and room and board, withdrawals from a Nebraska 529 plan are exempt from federal and state income taxes. This ensures that your savings are used to their fullest potential. 

Rollovers and Out-of-State Transfers 

If you've previously opened a 529 plan in another state, you can easily transfer those funds to a Nebraska 529 plan. This process, known as a rollover, allows you to consolidate your college savings and take advantage of Nebraska's tax benefits.  

Gifting and Family Contributions 

Nebraska's 529 plans make it easy for friends and family members to contribute to a child's college savings. By setting up gifting capabilities, loved ones can directly donate to the beneficiary's account. 

Navigating the Enrollment Process 

Enrolling in a Nebraska 529 plan is a straightforward process. The online enrollment process can be completed in 10 minutes, and you'll have the flexibility to manage your account, make contributions, and adjust your investment allocations as needed. 

Make the Most of your 529 Savings with Lutz 

As Nebraska's tax landscape continues to evolve, it's essential for businesses and individuals to stay informed about the potential impacts. Lutz's State and Local Tax Department is one of the region’s largest and most experienced groups of dedicated SALT professionals. 

Our team stays up-to-date on the latest developments in state and local taxation to ensure our clients are well-positioned to take advantage of tax-saving opportunities while remaining compliant with regulations. Whether you're considering a Nebraska 529 plan or have questions on other state and local tax matters, please contact us; we're here to help. 

Contributor: Brady Davis, Accounting Intern