Nov 08
21
How to deduct 529 losses from your taxes
I found this very interesting article on Marketwatch.com discussing the little known option of deducting losses on 529 plans. It is an interesting concept, and is quite logical.
Here’s the rundown: losses on a 529 are deductible to the extent they exceed 2% of your adjusted gross income. To be able to claim the loss, you would have to close all of your 529 accounts (the IRS views all of the accounts of a particular type as being one even though they may be held with different institutions) and withdraw the money and not reinvest it for at least 61 days.
Example: a married couple with an AGI of $100,000 has a $30,000 loss on their 529. $28,000 of that would be deductible ($30k less $100k*2%), resulting in a tax savings of $7,000 assuming a 25% marginal tax rate.
The idea works because 529s are funded with after-tax dollars (unlike 401ks and IRAs), and taxes and penalties only apply to withdrawals of EARNINGS not used for qualified purposes. If your account has taken a loss, there should be no earnings to tax. Because the contributions were previously taxed, you are allowed to deduct the loss on those contributions if they are realized.
Of course if you live in a state where you can deduct contributions from your state income tax return, this becomes a lot more complicated and you should consult a good accountant. You should also consult an accountant if you may be subject to the alternative minimum tax, as this would not qualify as an AMT deduction.