Student loan debt in the United States is exploding. It has already surpassed $1.7 trillion as of Q3 2020, and is only going higher. Americans are having an increasingly hard time handling this massive debt, and state government are starting to get involved, offering programs for families hoping to save money to handle the increasingly staggering costs.
Section 529 plans are IRS-sanctioned accounts that offer tax advantages for educational saving. Families can start contributing to their child's college fund early, and the account grows without taxation and can receive contributions from parents, family members, and friends (although there is an annual limit on contributions). Withdrawals are exempt from federal income tax if they're used for qualified medical expenses, and many states have begun waiving their taxes, as well.
Nebraska residents who plan on putting a child through college should start their financial research by learning about the tax benefits of the state's various 529 college savings plans. These 529 plans offer tax-advantaged ways to save money for educational expenses, and can reduce the stress that families feel when applying for financial aid, searching for scholarships, and choosing a school.
Nebraska 529 Plans
Through each of the following plans, the family members and friends of a future college student can make a contribution to their college fund and receive a tax deduction in return. Regular contributions, compound interest, and a shelter from state and federal taxes will help these plans to grow to accommodate many of the educational expenses a student will face when getting a higher education.
Nebraska's state-sponsored 529 plans include:
- Nebraska Education Savings Trust (NEST) Direct College Savings Plan: This NEST plan features three paths to investing based upon risk tolerance, time frame, and savings goals.
- Nebraska Education Savings Trust (NEST) Advisor College Savings Plan: This is another NEST plan that offers advantages to families who are working with a financial advisor to plan their college-savings portfolio.
- TD Ameritrade 529 College Savings Plan: This plan is similar to NEST, but it is distributed through TD Ameritrade at a slightly higher cost.
- State Farm College Savings Plan: State Farm's plan uses OFI Private Investments, Inc. for administration and investment management services, and it is distributed exclusively through State Farm representatives.
Nebraska College Savings Plan Tax Deduction
The maximum state deduction is $10,000 for taxpayers filing as a single head-of-household, or married and filing jointly. For those who use married, filing-separate returns, the deduction is $5,000. Account owners and parents or guardians who are custodians of a NEST Direct account are eligible for the applicable deduction.
This means that if a Nebraska couple filing jointly contributes more than $10,000 on behalf of multiple dependent beneficiaries, they are still only allowed to deduct a maximum of $10,000 on their tax return.
Only contributions made to the Nebraska College Savings Program, administered by the Nebraska State Treasurer, qualify for the deduction.
The Nebraska College Savings Plan tax deduction is an "above the line" income adjustment, meaning you can claim it even if you do not itemize your deductions by opting for the standard deduction. Contributions to your NEST account are made with after-tax dollars, and your earnings grow with the help of state and federal tax-deferrals while they're invested. Any investment growth is yours to use on educational expenses. There is no income phase-out on the Nebraska College Savings Plan tax deduction, and it's accompanied by a high contribution limit of $400,000 per beneficiary.
Value of the Savings Plan Tax Deduction
Nebraska residents trying to decide whether to use a Nebraska 529 plan versus that of another state need to account for the potential tax savings of contributing to their in-state plan. Nebraska does not currently offer a tax deduction to residents contributing to out-of-state plans.
Considering that the top Nebraska income tax rate is 6.84%, a full deduction of $10,000 can save a taxpayer up to $684 at tax time. Currently, Nebraska does not offer a tax deduction for contributing to other types of college savings accounts such as a Coverdell Education Savings Account or UTMA Custodial Account.
Residents can claim the Nebraska 529 plan tax deduction on their Schedule I - Adjustments to Income form, line 17. Contributions must have been completed by December 31 of a given tax year in order to be eligible for deduction.