New Jersey Provides Tax Deduction for College Savings Plan Contributions
Many states provide an income tax deduction for contributing to a college savings plan, including New York, which provides a maximum annual $10,000 deduction; Pennsylvania with a $30,000 maximum; and Connecticut with a $10,000 maximum. Beginning in tax year 2022, New Jersey will join its peers in allowing a state income tax deduction of up to $10,000 per taxpayer with a gross income of $200,000 or less, under the New Jersey College Affordability Act.
Also provided under the new law is a deduction of up to $10,000 on the gross income of currently enrolled students on payments made directly toward in-state college tuition. This applies to individual taxpayers as well as for any spouse or dependent. In other words, there is a state tax deduction of up to $10,000 on in-state tuition payments for families with incomes of up to $200,000.
Eligible taxpayers (households earning up to $200,000) will be allowed to deduct up to $2,500 from gross income for the principal and interest paid on a student loan under the New Jersey College Loans to Assist State Students (NJCLASS) loan program.
What does this mean in terms of tax savings? Take the following example: A taxpayer with total gross income of $175,000 is in the 5-percent tax bracket and contributes $10,000 to a New Jersey college savings plan in 2022. The New Jersey tax savings is approximately $500.
However, tax savings is not the only thing to focus on; management fees, annual fees and performance are other important considerations.
College savings plans fall under Internal Revenue Code Section 529, Qualified Tuition Programs. Unlike many states, the IRS does not provide a current tax deduction for contributions made to the plan. Contributions of up to $15,000 per beneficiary can be funded annually, and married couples can contribute up to $30,000 annually.
If a taxpayer wants to fund more in a given year, then a gift tax return needs to be filed. For those taxpayers who can afford to do so, up to five years’ worth of contributions can be funded in one year ($75,000 single or $150,000 MFJ) and, most likely, this would be an informational-only tax return filing since the lifetime gift tax exemption is over $11 million. The New Jersey college savings plan has a maximum contribution limit of $305,000 per student.
If the child has completed their college education or does not attend college, and money is withdrawn from the account and not used for qualified education expenses, the earnings are subject to a 10-percent penalty. One way to avoid the penalty is to change the beneficiary to another family member.
It is important to be careful with Form 1099-Q, Payments from Qualified Education Programs. When money is withdrawn from a college savings plan, the account administrator will issue a Form 1099-Q which shows the gross distribution, earnings and basis. If the distribution was used for qualified education, the earnings are clearly not taxable. However, if this information is entered into a tax software program and not coded correctly, the earnings are included in taxable income and the distribution could be subject to the 10-percent penalty. One easy solution is to ignore the 1099-Q form if it is known that the distribution was used for qualified education expenses.
Additional College Benefits
On top of the tax benefits, there are a number of other college-related benefits for New Jerseyans.
- New Jersey’s Higher Education Student Assistance Authority (HESAA) can provide taxpayers with gross income of $75,000 or less a one-time grant of up to $750 matched dollar for dollar on an initial deposit into a New Jersey Better Educational Savings Trust (NJBEST) 529 College Savings Plan account for accounts open on or after June 29, 2021.
- Effective June 2021, the NJBEST scholarship, which is available to students attending college in New Jersey, was increased from $750 to $3,000.
- New Jersey college students from households with incomes of less than $65,000 are now eligible for up to four years (previously two years) of free tuition and fees under the Community College Opportunity Grant Program. This does not cover books, transportation costs and room and board.
- The NJCPA Scholarship Fund supports accounting students with scholarships ranging from $1,500 to $6,500. More information is available at njcpa.org/scholarships.
Ralph Loggia, CPA, MST, is a partner at Goldstein & Loggia CPA’s, LLC. He is a member of the NJCPA State and Federal Taxation interest groups.
This article appeared in the Winter 2021/22 issue of New Jersey CPA magazine. Read the full issue.