Tax Advantages of Michigan's 529 Advisor College Savings Plan

What you need to know about claiming a deduction

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If you are a Michigan resident who plans to put a child through college, it's important to learn about the tax benefits available to you by contributing to the state's 529 College Savings Plans. Study the available savings options and the people they are designed to help, as well as their perks, with this review. If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships.

The goal of these plans is to provide tools to financial planners who need ways to help their clients face the sometimes daunting task of saving for college, while giving residents the opportunity to take advantage of a generous Michigan income tax deduction. Investments made in these accounts grow free of federal and Michigan state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal and Michigan income taxes. Qualified expenses include not just tuition, but certain room and board costs, computers and related technology expenses, books, fees, and equipment. Michigan is also one of 33 states and the District of Columbia that offer residents a tax deduction or tax credit.

Through these tax-advantaged plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses.

Michigan offers the following options:

  • Michigan Education Savings Program: Also known as MESP, this is a direct-sold 529 savings plan (MESP) managed by TIAA-CREF Tuition Financing. The Plan offers a choice of nine investment options. These options vary in their investment strategy and degree of risk, allowing investors to select an option or combination of options that fit their individual needs.
  • MI 529 Advisor Plan: Together with the State of Michigan, Allianz Global Investors Distributors and TIAA-CREF Tuition Financing Inc. have created a flexible, advisor-sold 529 plan to assist in saving for college. Choose from six age-based investment portfolios, two static investment portfolios, and eleven individual investment portfolios. These portfolios vary based on investment strategy and underlying risks.

Michigan also offers a prepaid tuition program, the Michigan Education Trust (MET), which is open to Michigan beneficiaries. MET contracts offer three purchase options: lump sum, pay-as-you-go, and monthly. What makes this program different from most is that contributions are irrevocable.

Tax Benefits of MI 529 College Savings Plans

The maximum contribution is $500,000. Contributors to MI 529 Plans can receive a state income tax deduction of up to $5,000 per year for each adult filer or $10,000 for joint filers. Even if a Michigan resident contributes large amounts on behalf of multiple beneficiaries, they can only deduct a maximum of $5,000 for a single return or $10,000 for a joint return each year. Any amount contributed over the limit is not deductible and may not be carried forward.

Value of the Michigan 529 Plan Deduction

Michigan residents trying to decide whether or not to use the Michigan 529 plan versus a college savings plan from another state need to account for the potential tax savings of contributing to their in-state plan. It is important to know that Michigan does not offer a tax deduction to residents contributing to out-of-state plans.

Considering that Michigan has a flat income tax rate of 4.25 percent, the full deduction of $5,000 can save a taxpayer up to $212.50 at tax time. Currently, Michigan does not offer a tax deduction for contributing to other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account.

Claiming the Tax Deduction

The Michigan 529 plan deduction is an "above the line" income adjustment, meaning residents can claim it even if they do not itemize their other deductions, and instead opt for the standard deduction.

Residents can claim the Michigan 529 plan tax deduction on their Michigan MI-1040 Form. Use Schedule 1 - Additions and Subtractions. Line 17 is for the Michigan Education Savings Program and MI 529 Advisor Plan and Line 18 is for the Michigan Education Trust.