What is your child's current age? What age do you expect your child to start college? What is your maximum 529 State Tax Deduction / Credit?
What you need to know about claiming a deduction
If you are a Michigan resident who plans to put a child through college, it's important to learn about all of the available options in terms of 'free money' for education, such as tax savings.
The state of Michigan provides tax benefits to you if you choose to contribute to the state's 529 College Savings Plans. Once you understand the available savings options and the people they are designed to help, as well as their perks, you may find some relief from the burden of college costs. This can help lessen the stress at admissions time about applying for financial aid or searching for scholarships.
The goal of these plans is to provide tools to financial planners who need ways to help their clients face the sometimes daunting task of saving for college while giving residents the opportunity to take advantage of a generous Michigan income tax deduction. Over time, your investments made in these accounts grow free of federal and Michigan state income taxes.
When it's time to pay those college bills, all of the money you withdraw and use for qualified higher education expenses is exempt from federal and Michigan income taxes. Qualified expenses include not just tuition, but certain room and board costs, computers and related technology expenses, books, fees, and equipment. Michigan is one of 33 states and the District of Columbia that offer residents a tax deduction or tax credit.
Through these tax-advantaged plans, family members and friends can contribute to a child's college fund and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. Michigan offers the following options:
- Michigan Education Savings Program: Also known as MESP, this is a direct-sold 529 savings plan (MESP) managed by TIAA-CREF Tuition Financing. The Plan offers a choice of nine investment options. These options vary in their investment strategy and degree of risk, allowing investors to select an option or combination of options that fit their individual needs.
- MI 529 Advisor Plan: Together with the State of Michigan, Allianz Global Investors Distributors and TIAA-CREF Tuition Financing Inc. have created a flexible, advisor-sold 529 plan to assist in saving for college. Choose from six age-based investment portfolios, two static investment portfolios, and eleven individual investment portfolios. These portfolios vary based on investment strategy and underlying risks.
Michigan also offers a prepaid tuition program, the Michigan Education Trust (MET), which is open to Michigan beneficiaries. MET contracts offer three purchase options: lump sum, pay-as-you-go, and monthly. What makes this program different from most is that contributions are irrevocable.
Tax Benefits of MI 529 College Savings Plans
The maximum contribution you can make is $500,000. Contributors to MI 529 Plans can receive a state income tax deduction of up to $5,000 per year for each adult filer or $10,000 for joint filers. Even if a Michigan resident contributes large amounts on behalf of multiple beneficiaries, they can only deduct a maximum of $5,000 for a single return or $10,000 for a joint return each year. Any amount contributed over the limit is not deductible and may not be carried forward.
Value of the Michigan 529 Plan Deduction
Michigan residents trying to decide whether or not to use the Michigan 529 plan versus a college savings plan from another state need to account for the potential tax savings of contributing to their in-state plan. It is important to know that Michigan does not offer a tax deduction to residents contributing to out-of-state plans.
Considering that Michigan has a flat income tax rate of 4.25 percent, the full deduction of $5,000 can save a taxpayer up to $212.50 at tax time. Currently, Michigan does not offer a tax deduction for contributing to other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account.
Claiming the Tax Deduction
The Michigan 529 plan deduction is an 'above the line' income adjustment, meaning residents can claim it even if they do not itemize their other deductions, and instead opt for the standard deduction. Residents can claim the Michigan 529 plan tax deduction on their Michigan MI-1040 Form. Use Schedule 1 - Additions and Subtractions. Line 17 is for the Michigan Education Savings Program and MI 529 Advisor Plan and Line 18 is for the Michigan Education Trust.
Most 529 plans offer age-based portfolios that automatically change allocations based on the age of the beneficiary. Generally, the portfolio is heavily weighted toward equities when the child is young and shifts toward more conservative investments when they get closer to college age. Age-based portfolios are a popular option for busy parents who prefer a hands-off approach to investing.
But remember – 529 plans only allow one beneficiary. That means the age-based strategy can only be tailored to one child. Using the same plan for multiple children can make it difficult to select the appropriate investment mix.
- Receiving And Tracking Gifts
529 plan contributions make great birthday, holiday and graduation gifts. Many plans now offer gifting platforms that can be personalized for each beneficiary. The account owner can share the page with friends and loved ones via email and social media, with instructions on how to make a secure electronic gift. Having a separate accounts makes it easier to ask for gifts and keep track of what each child receives.
- Allowing Kids To Help
As your children get older, they may want to start saving some of their own money from babysitting or other part-time jobs. And when it comes to college, your children may have very different plans. Some may want to attend an expensive private school, while others might not be sure about college at all. By having separate accounts, your children can each set individual goals to work toward.
- Gift Tax Exclusion
529 plan contributions are considered gifts for tax purposes, and up to $15,000 (in 2018) per beneficiary qualifies for the annual gift tax exclusion ($30,000 for couples). But remember, 529 plans can only have one beneficiary. If a grandparent wants to contribute $15,000 this year to each child’s college savings, there would have to be separate 529 accounts.
However, there is an option to spread a large 529 plan contribution as if it were made over five years. This would allow the grandparent to contribute up to $75,000 to a single beneficiary this year without triggering gift taxes or affecting their lifetime gift tax exemption ($11.18 million in 2018). But, if the two children had their own 529 plan account the grandparent would be able to contribute $30,000 this year, or $150,000 if using the 5-year gift tax election.
Grandparents sometime use 529 plans as an estate planning strategy, since they are able to remove a large amount from their taxable estate and still retain control of the assets. A grandparent can also open a 529 plan account in their own name for each beneficiary.
- State Tax Benefits
Over 30 states offer a tax credit or deduction for 529 plan contributions, and some states allow you to claim the tax benefit per beneficiary. In Ohio, for example, residents are eligible to deduct contributions up to $4,000 per each child’s Ohio 529 plan, with an unlimited carry forward. So, an $8,000 deduction for two kids, a $12,000 for three kids, and so on. But, Ohio parents who save for all three children in one account are limited to a $4,000 state tax deduction per year.
- Death Or Divorce
In the event something happens to the 529 plan account owner, the successor owner may not know if the plan was intended for more than one child, since only one beneficiary is named.
This can also cause problems when parents get divorced. 529 plans generally have just one account owner, and that account owner (not the child) has control of the assets. That means one parent has the ability to change the beneficiary on the account or take a non-qualified distribution to pay for something other than college. If you have a 529 plan for each of your children, you can specify in the divorce decree that the funds should only be used to pay for college expenses for the named beneficiary.
If you already started saving in one account for multiple kids, it’s not too late to make a change. Keep the original account for your oldest child, and open a new 529 plan for each sibling. Distributions rolled over to another plan with the same beneficiary or for the benefit of a qualified family member (including siblings) are not taxable.
Remember to explore all of your options when looking for a new plan – many are available nationwide. If your state has a limited tax benefit, or offers a matching contribution, consider using that plan for one child and looking at other options for their siblings. If you'll be using a 529 plan to pay for K-12 tuition expenses, you should also consider separate accounts for college and non-college costs.