The New Massachusetts College Savings Tax DeductionSubmitted by Breakwater Financial, LLC on June 16th, 2017
As of January 1st 2017 Massachusetts joins most other States in offering a tax deduction for contributions made into a 529 college savings plan. College savers and students have long enjoyed the tax benefits of 529 plans - namely tax deferred growth and tax-free distributions so long as the funds are used for qualified higher educational expenses. Now, this added tax benefit should come as welcome news for families saving for college; however, there are some restrictions and limitations to be aware of.
The first restriction is that to get the tax deduction, you must contribute to the state of Massachusetts's 529 plan. That plan, referred to as the Massachusetts Educational Financing Authority (MEFA) U. Fund college savings plan is currently offered through Fidelity Investments.
The most obvious limitations on the tax deduction are the caps on the amounts that can be deducted. Currently, those caps are set at $1,000 for single filers and $2,000 for married couples filing jointly. So, for a married couple in Massachusetts contributing at least $2,000 to the Massachusetts state-sponsored 529 plan, the maximum tax savings would be $102 from their State income taxes (at the current 5.1% rate). However, this tax savings would be offset by increased Federal taxes because State income taxes paid are generally deductible (assuming you itemize your deductions). For filers in the upper-income brackets, the additional Federal taxes due could be as much as $40. Vanguard has a great tool to illustrate the calculation based on your income here.
If the tax incentives are attractive enough for you, and you already have a 529 established, you could roll over your current 529 into the Massachusetts State plan. However, if you are happy with the current fund choices, performance, convenience, or cost of your current 529 plan, then you might choose to leave it where it is.
If you haven't yet started saving for college, then this may be a great opportunity to start. Just make sure to carefully evaluate any 529 college savings plan that you are considering based on all the relevant factors including its tax-deductibility.
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