I'd like to contribute to a 529 college-savings plan for my
12-year-old niece for Christmas. Is my contribution
Your contribution isn't tax-deductible on your federal return,
but two-thirds of the states do offer an income-tax deduction for
contributions. Most require that you contribute to your own state's
plan to get the break (Arizona, Kansas, Maine, Missouri and
Pennsylvania allow deductions for contributions to any state's
plan). But each state also has different rules about who can take
the deduction for their contributions.
Many states, such as Ohio, let residents deduct their 529
contributions to the state's plans even if they are not the account
owner. If you live in Ohio and your niece's parents already have an
account for her in that state, for example, you can deduct up to
$2,000 you contribute to her account per year (whether filing as
single or jointly), and you can apply any contributions above that
limit to future years' taxes. If your niece's parents don't have an
account for her in your state, you can open one for her yourself.
There's no limit to the number of 529 accounts that people can have
for one student, and the accounts don't need to be in the state
where the student lives.
Some states, however, only let you deduct your contribution if
you are the account owner. Account owners in New York, for example,
can deduct up to $5,000 per year in contributions to the state's
plan (or $10,000 if married filing jointly). If you live in a state
with this rule, you may want to open an account for your niece
yourself, even if her parents already have an account for her in
that state, so you can qualify for the tax break.
In states that permit only account owners to take the break,
nobody generally gets to take the deduction if someone other than
the account owner contributes to the account. Virginia is an
exception. It lets the account owner deduct the contribution even
when it is made by a nonowner, says Joe Hurley of
The other tricky area, says Hurley, is timing the contribution
so it is deductible this year. Most states require you to make your
contribution by December 31, 2012, to count for this tax year. But
a few -- such as Georgia, Oregon and Oklahoma -- give you until
April 15, 2013. States have different cut-off rules depending on
whether the contribution is made by check or electronic transfer,
he says. If you're making your contribution now, check the state's
rules to make sure it will count for your 2012 taxes.
For more information about the tax rules for 529s, see
. For our favorite plans, see our
Find the Best 529 Plan
What Grandparents Should Know About Opening 529
for the impact of 529s owned by grandparents (and other nonparents,
such as aunts, uncles and friends) on financial aid.
And for other ideas of financial gifts for kids, see
6 Tax-Smart Ways to Help Your Kids (or