As of January 1, 2014, contributions to North Carolina 529 plans are no longer deductible on your North Carolina state income taxes.
Beginning in 2006, North Carolina began to allow for a deduction up to $750 ($1,500 if filing jointly) for contributions to a North Carolina 529 plan. The deduction was eliminated for individuals whose federal adjusted gross income (AGI) exceeded certain levels.
In 2007, amendments were made to the tax code to increase contribution limits to $2,500 ($5,000 if filing jointly) and to remove the AGI restrictions that prohibited many individuals from utilizing the deduction.
While there is no longer a state income tax deduction for NC 529 contributions, there are still benefits to using a 529 plan for a loved one’s education:
- Earnings grow free of federal income tax
- No federal taxes on qualified distributions for education expenses
- No federal gift tax on contributions up to $14,000 in 2014 ($28,000 for joint filers)
- An individual can exercise a special tax provision to contribute five times the gift exclusion ($70,000-single or $140,000 filing jointly). One must elect to spread the deduction over the next 5 years on their gift tax return.
The beneficiary of a 529 plan can be changed to another family member of the original designee. Therefore, unused portions of an eldest child’s 529 can be used for a second child’s benefit without incurring additional taxes in the interim.
Contact our office with questions.