Q. We're going to contribute to a Sec. 529 plan for our granddaughter. Can we deduct the contributions on our tax return? R.S.
A. Not on your federal return. Contributions are not tax-deductible if made to either a college savings plan or a prepaid tuition plan. But no federal income tax is due on the earnings within the plan, and distributions generally are tax-free when funds are paid out to cover college costs.
On the other hand, depending on state law, contributions may be deducted on the state income-tax return or eligible for a state tax credit. Visit www.savingforcollege.com and click on “529 plans” to find out the rules for your state.
Tip: The regular gift-tax exclusion is $12,000/$24,000 per year. But you and your spouse can transfer the equivalent of five years of contributions (5 x $24,000, or $120,000) to a Sec. 529 plan in one shot without any gift-tax consequences.
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