New Mexico's 529 College Savings Plan: Tax Benefits
If you are a resident of New Mexico and plan to pay for your child's college tuition, it's important for you to know the tax benefits involved for you as a contributor to the state's 529 college savings plan.
What's in Store for You?
New Mexico’s 529 investing has some advantages over other states.
Mainly, residents who contribute to the college savings program receive a state income tax deduction for the entire amount contributed.
In other words, New Mexico's 529 plan tax deduction is "unlimited." The state is one of only four in the country to provide an unlimited state deduction for contributors to its 529 plan. This is especially beneficial for taxpayers who contribute more than the state’s standard tax deduction of $6,350 per year for a single person.
The New Mexico 529 plan tax deduction is an "above the line" income adjustment, meaning residents can consider it when deciding on the option to itemize or take the standard deduction. Both itemized and standard deductions are above the line deductions that reduce taxable income.
The New Mexico Higher Education Department (HED) has outlined some of the other benefits of 529 plans as well, including compelling savings advantages such as tax-deferred accumulation, federal and state tax-free earnings for qualified withdrawals, and special gift tax treatment. Additionally, 529 College Savings Programs offer personal control and flexibility over assets and beneficiaries. Beginning in 2018, 529 funds can also be used for K-12 education costs.
New Mexico's HED points out that very few students receive full scholarships to college. As a result, families must devise a multi-pronged approach to pay for a child's higher education. This can often include student loans and financial aid as well as savings plans. Money invested in a 529 college savings plan has the chance to grow tax-free, providing a substantial fund for assistance.
New Mexico residents trying to decide whether to use one of the state's college savings plans or another state's 529 plan need to account for the potential tax savings of contributing to their in-state plan. New Mexico does not currently offer a tax deduction to residents contributing to out-of-state plans. It is the case with many other states as well.
Considering that the top New Mexico income tax rate is 4.90 percent, each $1,000 contribution can potentially save a taxpayer up to $49 at tax time. Currently, New Mexico does not offer a tax deduction for contributing to any other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account.
Consult with a tax advisor or another professional of this sort if you have questions about the most appropriate college savings plan for your family. The Education Plan is New Mexico's Direct Sold College Savings Plan.