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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2009 CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.
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With 529 Values Plummeting, Parents Review College-saving Strategies(RIVERWOODS, ILL., January 2009) – Section 529 college saving plans had seemed like the ideal investment vehicle, but they quickly began losing their luster as the bottom fell out of the stock market in 2008 and taxpayers’ children continued to edge closer to college, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). After being made permanent in 2006, Section 529 plans took off, with more than $100 billion invested in these plans as of 2008. With 529 college savings plans, a taxpayer opens a savings plan sponsored by a state that allows proceeds to be used to attend a state or private university. Anyone, regardless of income, can contribute to a 529 savings plan with the investment growing tax-free. As long as the money is withdrawn to pay for qualified education expenses, the distributions also are not taxed. Many states also provide state tax benefits for 529 plan contributions. For parents with children nearing college, the issue with these plans, however, is that rather than continuing to increase in value, they’ve dropped in the bear market, causing many parents to rethink their approach to paying for college. “Some people are holding off on dipping into their 529s to pay for tuition until their children are further along in college with the hopes that the added time will give their portfolios a chance to recover,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. “Others are looking to see if there are different 529 savings plans that may be a better match for them or changing their investment strategies.” Roth added that those who want to make changes to their 529 plans need to remember that they can only make changes annually. This rule can be circumvented, however, if they change to a new 529 plan or if they change the name of the plan beneficiary, for example, to a younger sibling to allow the portfolio more time to recover. Individuals also can rebalance their 529s through new contributions to the plans, which can be made at any time and can be allocated as the contributor chooses. One strategy Roth strongly discourages is simply closing out a 529. Typically, if a distribution is taken for any reason other than a qualified education expense, there is a 10-percent penalty on the amount withdrawn and the individual owes taxes on the distribution. However, if contributions to a 529 plan exceed its current value, a taxpayer could conceivably shut the plan down and take a loss against income. The loss would appear as a miscellaneous itemized deduction on Schedule A, and it could only be taken if the total of miscellaneous itemized deductions exceeded 2 percent of the taxpayer’s adjusted gross income. An additional hazard is becoming liable for the alternative minimum tax (AMT), since miscellaneous itemized deductions are added back into income of AMT calculations. “Unless there is an emergency and no other resources, cashing out of a 529 plan entirely – even one that’s distressed – generally isn’t either a wise long-term investment strategy or a good tax move,” Roth said. “Using other approaches like changing plans, changing investment choices or just exercising restraint if the plan and portfolio are sound will probably yield greater benefits over time.” Some people also are looking to convert their 529 college savings plans to 529 prepaid tuition plans. With prepaid tuition programs, the taxpayer is allowed to pay for a designated beneficiary’s future college education using current-year dollars. Like 529 savings plans, anyone can contribute to a pre-paid plan, regardless of income. “The idea behind pre-paid plans is that you shouldn’t have to worry about the market performance. So, this has some people taking a more serious look at this option,” Roth said. “However, while these plans tout their advantage, it’s important to understand that there still is some risk. For example, states can suspend their plans or freeze the levels of contribution and/or distribution.” State Tax Savings for 529 PlansMost states allow taxpayers to use 529 funds to pay for education in other states and taxpayers are free to open up a plan in any state they choose. However, taxpayers generally only get a state tax advantage if they file a tax return in that state. Thirty-two states and the District of Columbia now provide that contributions to their state-sponsored programs may be partially or fully deductible by residents on their state tax returns. These states are Alabama, Arizona, Arkansas, Colorado, Connecticut, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin. Two additional states – Indiana and Vermont – do not allow tax deductions but do offer tax credits to residents participating in their state’s college savings plan. The extent of the tax breaks varies from state to state. For example, New Mexico, South Carolina and West Virginia allow deductions for the full amount of the contribution. For 2009, nine states also provide state matching grants, including Colorado, Florida, Louisiana, Maine, Michigan, Minnesota, North Dakota, Pennsylvania and Rhode Island. However, these grants require that the money be used by the beneficiary to attend a state school. (For an overview of all taxes see Release 25: Education Tax Breaks Worth Studying) About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® TeamMate, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com. -- ### -- nb-09-09
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