LUTZ BUSINESS INSIGHTS
Will a Nebraska 529 College Savings Plan Reduce Your Tax Obligations?
RUSS SMITH, TAX & CONSULTING DIRECTOR
Tax laws are changing. The Tax Cuts and Jobs Act (TCJA) limits a taxpayer’s itemized deductions of state and local taxes (SALT) to $10,000, beginning with the tax year 2018. With this new SALT deduction limitation, many taxpayers will be unable to itemize deductions. This means you, as a taxpayer, are more likely to be required to take the standard deduction. In short, the loss of the SALT deduction effectively increases the cost of your state and local taxes.
What can you do? For Nebraska residents, it may be beneficial to consider ways to reduce your Nebraska income tax. One way to do this is by utilizing Nebraska’s 529 College Savings Plan. How can this help you?
What Are 529 Plans?
A 529 plan is a type of savings plan designed to help people save for their children’s college expenses. It is a tax-advantaged plan, meaning it will allow you to reduce your tax burden. Individuals place money into these accounts each year during their child’s life so, when the child goes on to college, the funds are there. As long as they are used properly, the earnings are not taxed.
An investment in a 529 college savings plan under the new TCJA tax law offers more flexibility. Under the new law, these plans will now 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.
What Does the Nebraska 529 College Savings Plan Offer?
The Nebraska 529 college savings plan gives account owners the ability to tap into these key tax-free savings opportunities, as well as receive additional Nebraska income tax benefits. The Nebraska College Savings Plan allows residents to contribute money towards their NEST accounts and receive a Nebraska income tax deduction for the contribution amount up to $10,000. Contributions to any other state’s 529 plan are not deductible for Nebraska taxes.
TCJA: Why It Does Not Apply to Nebraska’s 529 Plan
The new TCJA tax law does impact the way Nebraska’s NEST account owners can use funds. Under the TCJA, account owners can use the funds to pay for K-12 public education. In doing so, the funds are treated as a qualified expense for federal income tax purposes. This means account holders do not need to pay federal taxes on the earnings.
However, Nebraska’s 529 Plan laws are different. Currently, Nebraska’s 529 plan limits qualified expenses to higher education, not K-12 education. For this reason, account owners who take a withdrawal from their NEST account to use for K-12 educational expenses will be subject to Nebraska income tax on the earnings portion of the withdrawal. In addition, the withdrawal will be subject to recapture of any Nebraska state income tax deduction previously claimed.
Anyone considering using the NEST plan needs to understand the benefits and limitations of the plan. For Nebraska residents looking to fund higher education costs, the NEST plan continues to offer excellent tax savings opportunities from both a Federal and Nebraska perspective. Also, with the potential loss of SALT deductions for many taxpayers beginning in 2018, the Nebraska 529 plan offers a way to reduce the effective cost of Nebraska income taxes while paying for the educational needs of your children and loved ones.
ABOUT THE AUTHOR
RUSS SMITH + TAX & CONSULTING DIRECTOR
Russ Smith is a Tax & Consulting Director at Lutz with over 20 years of state tax experience. He specializes in state income tax planning and compliance and helps clients minimize state and local taxes through the use of incentives.
AREAS OF FOCUS
- Tax Planning & Compliance
- State and Local Tax (SALT)
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA, University of Nebraska, Kearney, NE
- Graduate Studies, University of Nebraska, Lincoln, NE
- Douglas County Historical Society, Board Member
- Douglas County Historical Society Foundation, Board Member
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