529 and tax deduction for education expenses

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Callalily
Posts: 32
Joined: Wed Dec 16, 2009 11:42 am

529 and tax deduction for education expenses

Post by Callalily »

My husband is going back to school in February 2014. As a result, I'm trying to learn as much as I can about 529s and tax deductions for educational expenses.

We live in PA, so 529 contributions are tax deductible at the state level, but since we won't be earning much in the 529s, is the tax deductible contributions worth it? My understanding is that if I use 529 monies to pay for education, I won't be able to claim the Tuition and Fees Deduction or the Lifetime Learning Tax Credit at the federal level. Am I right? I anticipate educational expenses to run about $10,000/year.

Any replies much appreciated.
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vectorizer
Posts: 511
Joined: Sat Mar 03, 2007 2:52 pm

Re: 529 and tax deduction for education expenses

Post by vectorizer »

Generally, making a 529 contribution for the sake of the Penn. state income tax deduction is worth it, even if you expect zero gain in the account. In effect, at worst case it's a 3% tuition discount (assuming no capital loss).

No, you don't have to give up the federal tax credit or the less-valuable deduction. You can choose to pay tax on the 529 gains and take the credit; you do not have to pay the 529 10% penalty in this case. In other words, you can either take the credit, or take the deduction, or take the 529 non-taxable gains -- just as long as you don't double-count the education expenses that justify the tax advantage. (There are a lot of footnotes to these statements, but I didn't want to make my reply too complex.)

It is good that you're studying up on the subject of 529s and other tax considerations for education. The subject is complicated.

I recommend going right to the source and studying publication 970 (PDF version).
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