Distribution of principal or earnings from the account, so long as the money is spent on a qualified educational expense, is also tax free. Distributions for other expenses can be made but the earnings will be taxed, and the recipient will likely face a 10% tax penalty.
Previously funds from a 529 plan could only be used to pay expenses for post-secondary education.
In some states the benefit is also more than an increased opportunity to save and help provide for the education of younger family members. While there are no federal tax deductions for contributions to a 529 plan, over 30 states allow some form of deduction or offer another benefit such as a tax credit.
Under the new law, residents of these states would be foolish not to take advantage of the plans.
Many parents and grandparents have opened accounts naming a younger family member the beneficiary, contributed to the account up to the state benefit limit, and made distributions in the amount deposited or of full tuition.
In Maryland, yearly contributions of up to $2,500 for an individual or $5,000 for a married couple are deductible from state taxable income.
However, these benefits have led to extreme growth in the popularity and use of 529 Education Savings Accounts to the point where many states are examining changes to their deductions or covered expenses to meet the increased funding demands.
Mr. Abraham is an experienced attorney and founding member of the Law Firm of Abraham & Bauer. The Towson, MD office of the firm concentrates its practice in Estate Planning, Elder Law, Probate, Medical Assistance (Medicaid), Guardianship, Asset Preservation and Fiduciary Representation.
He is an active member in a number of professional organizations that focus on law, the senior community, and estate planning. He works with clients in Central Maryland, especially in Towson, Hunt Valley, Lutherville/Timonium, Parkville, White Marsh, Bel Air & Northern Baltimore City.
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