How to Claim Your Virginia State Tax 529 Contribution Deduction

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529 plans, or Qualified Tuition Programs as the federal government calls them, are specialized investment accounts to give tax-advantaged savings for education expenses. 529 plans are typically the best vehicle to save for college. Thanks to the 2018 Tax Cuts and Jobs Act, you can now also reimburse yourself up to $10,000 for elementary or secondary school tuition.

Contributions to a Virginia 529 plan offer the account owner a Virginia state tax deduction. Then, distributions to reimburse for any qualified education expenses are distributed both state and federal tax-free.

Qualified education expenses include college tuition and fees; books, supplies, and equipment; expenses for special needs services as required by a special needs beneficiary; expenses for room and board, so long as the student is enrolled at least half-time; the purchase of a computer, peripheral equipment, software, internet access, and “related services;” as well as lower school education tuition. For the most accurate list, you can review the qualified tuition program (QTP) section of IRS Publication 970.

Although many people know about the tax advantages of 529 plans, it is confusing in Virginia to figure out how to claim your 529 contribution deduction. That being said, once you know where to look, the deduction is easy to claim.

Form ADJ of the 760 lines 8a – 8c are where you report miscellaneous deductions. In the first few boxes, you put the relevant deduction code and then in the last few boxes you put the dollar amount you get to claim.

The codes are found in the Form 760 instructions, which includes the following:

104     |     Virginia529 Account Contributions

If you are under age 70 on or before December 31 of the taxable year, enter the lesser of $4,000 or the amount contributed during the taxable year to each Virginia529 account (Virginia 529 prePAID, Virginia 529 inVEST, College America, CollegeWealth).

If you contributed more than $4,000 per account during the taxable year, you may carry forward any undeducted amounts until the contribution has been fully deducted.

However, if you are age 70 or older on or before December 31 of the taxable year, you may deduct the entire amount contributed during the taxable year. Only the owner of record for an account may claim a deduction for contributions made.

Although these instructions are a bit confusing, they can be stated more simply: For those under age 70, the deduction limit is $4,000 per account per year. For those over age 70, you can deduct the entire amount.

Oddly enough, what qualifies something as a unique account is a unique account registration and investment portfolio selection. In other words, each unique owner-beneficiary-portfolio combination counts as its own account.

A married a couple saving for their son’s college education can benefit from opening multiple 529 accounts. One account could be owned by the husband for the benefit of the son invested in a U.S. stock mix. The other account could be owned by the wife for the benefit of the son invested in a Resource Stock mix. With only these two accounts, they could deduct up to $8,000, which is $4,000 per account, per year.

If the family contributed:

  • $6,000 to the husband’s U.S. stock portfolio 529 account for the benefit of the son
  • $4,000 to the wife’s Resource Stock portfolio 529 account for the benefit of the son

They could deduct $8,000 on line 8a under code 104 and would still have a $2,000 carryforward deduction.

By opening a third account with a new unique owner-beneficiary-portfolio combination, such as an account owned by the wife for the benefit of the son invested in a U.S. stock mix, they could increase their per year deduction capabilities to $12,000 per year and deduct all $10,000 of their contributions.

Virginia law says with regards to the excess contributions:

If the purchase price or annual contribution to a college savings trust account exceeds $4,000, the remainder may be carried forward and subtracted in future taxable years until the purchase price or college savings trust contribution has been fully deducted;

Most professional tax preparation software has a mechanism for your tax preparer to keep track of your carryforward balance from year to year. However, if you are doing your own taxes or might switch tax preparers from year to year, it is likely best practice to keep your own records to ensure that you do not lose track of excess contributions you still need to deduct. A simple spreadsheet or other file kept with your tax return records is sufficient.

Interestingly, if you transfer ownership of the 529 account, the deductions stay with the account. As the Virginia law and FAQs describes:

In the case of a transfer of ownership of a prepaid tuition contract or college savings trust account, the transferee shall succeed to the transferor’s tax attributes associated with a prepaid tuition contract or college savings trust account, including, but not limited to, carryover and recapture of deductions.

The new owner of a plan may use the full amount of deductions for the original owner’s payments or contributions when the original owner was not able to use the deductions.

It is important to note that although the federal government allows $10,000 of elementary or secondary tuition per beneficiary to be reimbursed as a qualified education expense, a family will need to open at least 3 accounts to be able to deduct the full $10,000 on one year’s tax return. In this way, if you are trying to flow a private school tuition reimbursement through your 529 to receive a state tax deduction, you may be further limited in the amount you can deduct on your state taxes than you are in the amount you can withdraw unless you are willing to open multiple unique accounts.

Also, the IRS’s $10,000 private school tuition limit is per beneficiary. As the IRS clarifies:

One of the TCJA changes allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiary’s choosing.

Opening more accounts does not expand the amount of private school tuition that you can reimburse for one beneficiary in one year. Instead, more accounts simply expands the total state tax deduction you can get in one year for contributions.

With a Virginia 529 account, Virginia taxpayers who own 529 accounts may contribute what they’d like to the 529 account and then deduct on their state tax return contributions up to $4,000 per account per year with an unlimited carryforward to future tax years. Even if you haven’t opened sufficient accounts to get the full deduction this year, you can eventually receive state tax deductions for all your contributions later from your carryforward.

Photo by Matt Ragland on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.