Changes to OR 529 Plan Tax Benefits
Fellow Oregonians may have received an email today from the Oregon College Savings Plan about changes in the state tax benefit beginning in 2020. These changes create some opportunities for increased tax savings over the next several years.
What’s changed? The current tax deduction— for contributions of $2,435 (single filers)/$4,870 (married filing joint) in 2019– will be replaced with a tax credit of up to $150 (single) or $300 (MFJ) in 2020.
Currently, the deduction is based strictly on contributions: you get a tax deduction for every dollar you contribute up to the maximum deductible amount. That translates to a maximum tax deduction of $482.13 for a joint filer in the top tax bracket.
Beginning next year, a percentage of your contribution ranging from 5%-100% will be eligible for a tax credit. The eligible percentage is based on your income. That means that in the lowest income brackets, you receive a dollar-for-dollar tax credit up to the credit amount: a single filer with income below $30,000 would receive a $150 tax credit if they make a $150 contribution, whereas a single filer with income above $250,000 would have to contribute $3,000 to get that $150 tax credit. Here is the bracket schedule.
There are a couple of nuances to the change that present some planning opportunities:
The current deduction has a carry-forward provision that allows you to take a tax deduction in future years if you contribute more than the deductible amount in one year. You can carry forward for four years. So someone who contributes $25,000 in one year could continue claiming the deduction for four years as they subtract the annual maximum deduction from that $25,000 each year. For example, in 2019, you’d claim the deduction for $4,870 and still have $21,130 that you could deduct in future years. In 2020, (assuming the same amount is deductible) you’d claim the deduction for another $4,870 of that original $25,000 and continue doing so for three additional years until you’ve claimed the deduction for the full original contribution. However, no additional contributions during that time would be eligible for tax deductions.
The new tax credit allows you to “double-dip” on tax benefits for the four years starting in 2020. Let’s say you made the above $25,000 contribution this year (2019), then next year (2020) contributed the amount that gets you the maximum tax credit. You’d get your carry forward tax deduction plus the tax credit for the new money you contributed. The maximum annual tax savings in this case goes from $482.13 to $782.13 for married filers who had the maximum carry over under the 2019 rules and the maximum credit-eligible contribution under the 2020 rules.
The tax credit is refundable, meaning you are eligible for it even if you do not owe taxes. That means that, for example, teenagers who have earned income could contribute to their own 529 plan and get a tax credit even if they did not have an Oregon income tax liability.
What does this mean for you? If you have surplus funds available for college savings, you can maximize the tax benefits under the current and new rules by making a maximum contribution in 2019 (up to $25,000), and then continuing to make annual contributions in subsequent years. This allows you to claim both the deduction that the 2019 rules allow and the credit that the 2020 rules allow. And starting next year, your teen or college student with earned income can contribute $150 annually to their 529 and get a $150 tax credit in return. Keep in mind, any Oregon resident can take a deduction or credit for their contribution to any Oregon College Savings Plan account: your own, your child’s or grandchild’s, niece’s, nephew’s or friend’s. It’s up to you to keep records showing the contribution in the event of an audit. And Oregon residents with out-of-state family members contributing to your child’s 529 can take a deduction (or credit) for those out-of-state contributions on their Oregon taxes.
For more on the changes to the Oregon plan, continue reading OR 529 Part 2 here.
