Student loan debt in the U.S. is on track to exceed $1.5 trillion in 2020. As multiple generations of young Americans struggle against the burden of this debt, state governments are being forced to search for better ways to support families who want to save money for their children's higher education.
If you're a resident of Louisiana and plan to save for your child's college tuition, it's important to know the specific tax benefits of being a contributor to the Student Tuition Assistance and Revenue Trust (START) saving program, which utilizes Section 529 savings plans.
What Is a Section 529 Plan?
Section 529 plans are IRS-sanctioned accounts that offer tax-advantages for educational saving, and allow families to begin contributing to a child's college fund as soon as a baby is born. Such accounts grow free of taxation and can receive contributions from parents, family members, and friends up to a certain dollar amount each year. All withdrawals used for qualified educational expenses are also exempt from federal income tax, and many states have begun waiving their taxes, as well.
START is Louisiana's state-sponsored 529 savings plan, intended to reduce the stress of applying for financial aid or searching for scholarships by helping residents build a tax-protected fund over many years.
Deduction Rules for Louisiana's START 529 Plan
Louisiana is one of a few states that offer some extra tax advantages through its START plan. Louisiana residents who contribute on behalf of multiple children are entitled to multiple state tax deductions, up to the limit of $2,400 per child per year.
In order to be protected from tax at the time of use, expenditures from a START fund must be used at an accredited college or university (in or out of state) or at state-approved proprietary schools (private career institutes) in Louisiana. Louisiana has separate START K-12 plans which are meant to save for expenditures on tuition, books, and other costs of primary or secondary schooling.
Couples filing jointly in Louisiana may each claim the deduction separately, effectively doubling the amount that joint taxpayers can contribute while still receiving the deduction. For example, if a married couple has three children, each parent may deduct contributions of up to $2,400 per child, for a possible total deduction of $14,400 annually (three children x $2,400 [maximum deduction] x two parents).
The Louisiana START 529 savings plan deduction is an "above the line" income adjustment, meaning that residents can claim it even if they do not itemize their other deductions and opt for the standard deduction. Residents can claim the Louisiana START 529 tax deduction on Schedule E (using Code 09E) of their Louisiana Form IT-540.
Unique to the Louisiana START 529 deduction is the existence of a "carryforward" provision. The carryforward provision allows a taxpayer to carry over any unused portion of the tax deduction into the future so as to offset any expected profits down the line, reducing future tax liability.
How to Decide Whether to Contribute
Louisiana residents debating whether or not they should contribute to a Louisiana START 529 savings plan (versus other savings vehicles) should account for the large potential savings on their Louisiana state income tax deduction. Another advantage of using the START plan is that, depending on your income level, the state will match up to 14% of deposits each year with earnings enhancements. Louisiana residents do not receive an income tax deduction for contributing to any other form of Section 529 plan.
Considering that the top income tax bracket in Louisiana is 6%, each $2,400 contribution to the Louisiana START 529 savings plan may save a taxpayer up to $144 at tax time. While this is attractive, it still may not offset the benefits of using other non-deductible college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account.
Taxpayers should know and compare the federal tax advantages of any 529 before making contributions. At the federal level, 529 contributions can also be involved in gift tax considerations and are subject to gift tax exemption limits.