More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
If your client starts a 529 college savings plan in the same year their child matriculates, they might need help with the concept of “planning.” But unlike homeowners in a desperate search for insurance ahead of a storm, late college saving is better than no college saving and can still do some good.
The Wall Street Journal’s Rachel Rosenthal helpfully notes that for “parents sending high-school seniors to college in the fall, here's a surprising financial tip: Contributing to a 529 plan even just months before the first tuition payment is due will qualify the account owner for a tax benefit in many states.”
Under certain conditions, adding to a 529 can lower the state taxes a client owes in 34 states and the District of Columbia, she writes, citing the college planning website FinAid.org.
“Make sure your plan doesn't require a minimum holding period before withdrawals to get the tax break,” according to Rosenthal. “While most states don't require such a holding period, a handful do—like Michigan. There, the deduction of up to $5,000 per year for individuals (and $10,000 for a married couple filing jointly) is determined by subtracting distributions from the total contributions to the plan within the same calendar year. This implies you need to take the distribution in a subsequent tax year to get the deduction.”
Joe Hurley, founder of the website savingforcollege.com told Rosenthal he wouldn't be surprised if more states add holding-period requirements because of the revenue losses states have suffered in recent years. It's possible, he says, that most states either haven't seen this as a big issue or that they remain unaware of it. Investors can open any state-sponsored 529, though most states offer tax incentives only for residents who enroll in a plan in their home state.
Note that some states—including Pennsylvania, Arizona, Maine, Missouri and Kansas—offer a tax benefit for contributions to out-of-state plans. No break is available in states without income tax, Rosenthal concludes.
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