Q. In your recent article on Section 529 plans, you mention state income tax on distributions. But don’t state taxes also affect contributions? A.C., via email
A. Yes. As you correctly point out, an individual state may allow deductions up to a specific threshold. For instance, if the state where you reside allows deductions of up to $10,000 on a joint return, you might decide to contribute $10,000 to the account each year for a period of time instead of forking over $70,000 in one fell swoop to qualify for the gift tax break. (This is based on the annual gift tax exclusion of $14,000 for 2013 times five years.)
Tip: Coordinate tax strategies for Section 529 plans on both the federal and state levels.