Most states that have an income tax provide some sort of state tax deduction for contributions to a 529 college savings plan. Typically the contribution must be made to that state’s 529 plan. So, for example, to take a deduction against Colorado income tax the contribution must be made to one of Colorado’s four 529 plans. This deduction is typically not unlimited. The vast majority of states provide a dollar limit on the contribution that will be deductible. See this great educational website for state by state details https://www.savingforcollege.com/compare-529-plans/state-tax-deductions/.
Until recently Colorado was one of the few exceptions, allowing an unlimited deduction on contributions to one of the state’s 529 plans to the extent of the taxpayer’s taxable income. This is going to change effective January 1, 2022 – the Colorado State Legislature just passed a bill that places an annual cap on the deduction for Colorado 529 contributions depending on filing status.
Single Filers $20,000 per beneficiary annual cap
Joint Filers $30,000 per beneficiary annual cap
The way the legislation is currently drafted, each individual filing a joint return would be entitled to a $30,000 deduction so that a couple could take up to $60,000. It seems unlikely that the Legislature meant to penalize single filers and more likely that they intended the deduction for couples to be limited to $30,000. That said, until additional legislation or clarifying regulations are passed, this does appear to be the law.
For income tax years on or after January 1, 2023, the cap will be annually adjusted by the percentage change in the combined average annual costs of tuition and room and board for all the state higher education institutions.
Given that 2021 is the last year Colorado will offer a dollar for dollar state tax deduction for contributions to one of the State 529 plans, Colorado taxpayers may want to consider frontloading contributions before the end of the year. Of course, each taxpayer’s situation is unique and the benefits of frontloading will depend on a number of factors including the age of the child, any current 529 balance, the educational goals and the taxpayer’s financial and tax situation. Before making any decisions, it’s important to consult your tax and financial advisors.
Marti is the Chair of the Board of Trustees for CollegeInvest, Colorado’s State 529 Plan. She was first appointed to the board by Governor Hickenlooper and later by Governor Polis.
General Disclosures: Please consult your Tax Advisor for a complete discussion of your situation and specific tax consequences. The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer decisions. All expressions are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results. Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited.