New changes to Maryland Section 529 investment plans

If saving for college is on your list of New Year’s resolutions, new laws in Maryland will make 2017 a great year to start. Two new changes to Maryland Section 529 investment plans will make them even more attractive vehicles to save for college expenses. A Section 529 plan is created by making contributions to the Maryland College Investment Plan (which is managed by T. Rowe Price) on behalf of a beneficiary. The beneficiary can be anyone who will be able to use the money towards qualified higher education expenses—a child, grandchild, friend, or even the account holder. Earnings on the contributions grow tax-deferred (at both federal and Maryland levels) and will also be free from federal and Maryland taxes on withdrawal, provided that the money is used for qualified education expenses. In addition, taxpayers can take a subtraction on their Maryland income tax returns of up to $2,500 in contributions per beneficiary ($5,000 for married filing jointly if each contributes $2,500). Amounts contributed in excess of that amount can be carried forward and used for up to 10 years.

The first change affects who can take the subtraction for contributing to a plan. Until recently, only the account holder could take the subtraction. Beginning July 1, 2016, a subtraction is available for anyone making a contribution to plan, even if they are not the account holder of the plan. For example, parents could establish a plan for their child, and the subtraction would be available not only to them, but also to any other relatives and friends who would contribute.

A second change affects the benefits available to account holders who make plan contributions. As an alternative to the Maryland income tax subtraction, the College Affordability Act of 2016 provides that the state will make a $250 “matching” contribution to for qualifying accounts. In order to qualify:

  • The account must be established after December 31, 2016;
  • the qualified beneficiary must be a Maryland resident;
  • the account holder must have had Maryland taxable income in the previous tax year of no more than $112,500 ($175,000 for a married couple filing a joint return);
  • the account holder must submit an application between January 1 and June 1 for each year that the matching contribution is requested; and
  • an approved account holder must make a contribution between July 1 and November 1 of the year for which the contribution was approved. The amount of contribution ranges from $25-$250, depending on the applicant’s income.

The funds available are limited, so matching contributions will be awarded on a first-come, first-serve basis each year. Note that because the matching contribution comes at the expense of the income tax subtraction, each individual’s personal financial and tax situation must be carefully considered to determine which alternative would be more beneficial. In addition, the use of a Section 529 Plan must be coordinated with any federal tax credits available for education expenses in order to obtain the maximum tax savings.

To see if these new opportunities could help you and your family, contact your Hertzbach Tax Advisor at 410-363-3200 or 800-899-3633. We look forward to speaking with you.