A 529 plan is a college savings plan designed to help build wealth to pay for college expenses. Each 529 plan has a single named beneficiary whose college education can be funded with the 529 funds. One major benefit of all 529 plans is that anyone can contribute; another benefit is that withdrawals for qualified educational spending are not charged federal or state income tax. Grandparents also can take state tax deductions on contributions made to 529 plans as well.
Grandparents are able to take Pennsylvania state income tax deductions for contributions made to 529 plans, regardless if they are the plan owner or not.
Exploring Tax Deductions For 529 Contributors
Pennsylvania allows contributors to 529 plans to take a tax deduction each year up to the gift tax exclusion. This is the maximum annual amount in personal gifts that you can give without triggering the gift tax.
In 2019, Pennsylvania taxpayers could claim a tax deduction of up to $15,000 per individual or $30,000 for a married couple on 529 contributions. Contributors to 529 plans are not limited to the account owners. In fact, anyone can contribute to a 529 plan, including the grandparents of the beneficiary of an account. Grandparents can also serve as the account owners of 529 plans.
Assessing State 529 Plans
Pennsylvania offers two 529 plans. One is called the Guaranteed Savings Plan, and the other is called the College Investment Plan.
The Guaranteed Savings Plan, which is a prepaid tuition plan, offers the capability to lock in tuition rates and mandatory fee levels at participating schools, ensuring that your investment will keep up with rising higher education expenses.
The College Investment Plan, which is a college savings plan, provides a vehicle to invest money so that it can grow in value and be used for college expenses. Tax deductions for contributions are the same for each plan.
Evaluating Deduction Flexibility
Currently, more than 30 states and the District of Columbia offer some sort of state tax benefit for contributing to a 529 plan; seven states, including California, Hawaii and Delaware, offer no tax benefits at all. Generally, you need to have made the contributions to a 529 plan in your home state to qualify for any tax benefits. But seven states, including Pennsylvania, allow for tax benefits when you contribute to any 529 plan.
Identifying Other Tax Impacts
Grandparents and other contributors do not receive a federal tax deduction for contributions that they make to a 529 plan. However, Pennsylvania offers an inheritance tax exclusion for assets held in one of the Pennsylvania 529 plans.
For instance, if a grandparent who owned a Pennsylvania 529 plan to benefit a grandchild died, then the grandchild would not be charged an inheritance tax on the contents of the plan. Grandchildren in Pennsylvania typically are charged a 4.5 percent inheritance tax on the total value of assets that they inherit from grandparents.