Whitefield Academy Blog
Saving Money with 529 Accounts
Since my last post, Congress passed the new tax law and it became effective. I also spoke to my father-in-law while celebrating Christmas and he shared an additional idea about the new law which I think would be very valuable to many Whitefield families.
In our last post about the new tax law, I mentioned that under the new law, 529 accounts can be used to fund K-12 school tuition but that this wasn’t as big of a benefit as people might think since 529 accounts are mostly helpful for long-term savings. But I had forgotten about the fact that some states allow contributions to 529 accounts to be deducted from state income tax. In such states, even if you withdraw the money from the account the day after you contribute it and use that money for K-12 tuition, you could deduct that amount from your state (not federal) income tax. State income tax rates are much lower than federal rates, so this still won’t be a huge benefit, but when you’re paying school tuition, every bit helps.
State Income Tax
Since state income tax is based on where money is earned, you should think about the state in which you work rather than in which you live to determine which rules apply to you (look at a W-2 to see which state is taxing you). Since Whitefield Academy is located about a stone’s throw away from the Kansas-Missouri state line, I’ll discuss both states.
For both Kansas and Missouri, it doesn’t matter to which 529 plan you contribute. Most states, including Kansas and Missouri, have set up 529 plans, so you can shop around and find the one with the best investments and lowest costs, or keep it simple and use your state’s plan.
In Kansas, you can deduct $3,000 ($6,000 if married) per beneficiary (each child you’re paying tuition for is a beneficiary). The Kansas income tax rate is 4.6% of income earned above $15,000, so you could save enough money to buy a round-trip ticket to Mexico for each child in school (4.6% of $6,000 is $276). You may have to save up some other way if you want to go with them.
In Missouri, you can deduct up to $8,000 ($16,000 if married), and the Missouri income tax rate is 6% of income over $9,000. The maximum does not appear to be per beneficiary, unlike in Kansas. A family with married parents contributing the maximum amount will save $960. That’s enough for Mom and Dad to fly to Hawaii and back, if you wait for a good deal. Leave the kids with Grandma.