If you are paying for college (for yourself or someone else), get ready for a huge tax savings on your Indiana state tax return!
The Indiana Code (IC 6-3-3-12) provides a tax credit for contributions to the Indiana CollegeChoice 529 Education Savings Plan. You can receive up to a $1,000 tax credit, meaning if you owe state tax, you can erase $1,000 from your tax liability.
A 529 plan is a state-based college savings plan. You establish an account, transfer money into the account, and invest the funds. When college expenses roll around (tuition, fees, books, supplies, and equipment required by the educational institution for enrollment or attendance), you pay these costs from your 529.
There are several advantages that come with a 529 plan. Your federal income tax may be reduced. Though contributions are not deductible, your investments grow tax-deferred, and any withdrawals used to pay for the beneficiary’s college costs are federally tax-free.
A 529 plan must be established and maintained by a state or state agency. Many states have established 529 plans, and you can freely choose any state’s plan that you want. Usually, the investments can be used to pay for college in any state you choose, regardless of the state that maintains the plan.
If you expect an Indiana state tax liability and you expect to pay college expenses for anyone, Indiana provides a tax credit equal to 20 percent of your contributions to the Indiana CollegeChoice 529 Plan, up to $1,000. If you contribute $5,000 or more to the plan in a calendar year, you can take full advantage of the tax credit on your state tax return.
To take advantage of the tax credit for this year, establish a 529 account and deposit up to $5,000. You can deposit more, much more. Because you can distribute the funds immediately (almost!) after deposit, you can contribute your next college payment to your 529 plan, then pay from that account, and receive the tax credit.
Remember: you must use the Indiana CollegeChoice 529 Plan, and this credit only applies to an Indiana state tax return.
Example: Joe’s fall tuition payment is due in August for $6,000. His parents deposit $6,000 in the 529 they’ve established for his benefit. A week or two later, they request a distribution of $6,000 directly to his school. Next year, they will claim the full $1,000 credit on their Indiana tax return.
Because investments are risky, care must be taken to choose the correct investment strategy in your 529 plan. Consult with Endress Capital Management for all of your investment needs.