Do you want to reduce your PA personal income taxes?
As a PA resident, your contributions to a 529 account may be tax deductible from your PA state income tax. Notice the use of the word “may” versus “are” tax deductible. Many taxpayers are under the misconception that all contributions up to the current $14,000 annual limit (per beneficiary) are tax deductible for PA. Thus, taxpayers don’t pay attention to which spouse makes the 529 contribution or do not make the contributions from a joint bank account.
Let’s look at some PA tax-savings examples and the pit-falls to avoid.
Example 1: Husband and wife both work, each earn at least $28,000 in wages or some other form of taxable income, and have two children. Each spouse contributes $14,000 from their separate bank accounts to each child’s 529 plan. On the couple’s PA-40, they can each deduct $28,000 (a grand total of $56,000) from their PA wages and save $1,719 in PA taxes (3.07% X $56,000). Note: There is no federal income tax benefit for making a 529 plan contribution.
Example 2: The facts in this example are the same as in Example 1, except each spouse contributes $14,000 from a joint bank account to each child’s 529 plan. On the couple’s PA-40, they can each deduct $28,000 (a grand total of $56,000) from their PA wages and save $1,719 in PA (3.07% X $56,000).
Example 3: The facts in this example are the same as in Example 1, except each spouse contributes $14,000 from a bank account held in one spouse’s name only to each child’s 529 plan. As in the above examples, the couple has made a $56,000 contribution to both 529 plans, but on the couple’s PA-40, they can only deduct a total of $28,000 from the PA wages of the spouse whose bank account was used. Thus, the tax savings is only $860.
Example 4: Only one spouse works and that person has at least $56,000 in taxable income. The other spouse has no sources of PA taxable income. Each spouse contributes $14,000 from a joint bank account to each child’s 529 plan. As in the above examples, assume that the couple has made a $56,000 contribution to both 529 plans. However on the couple’s PA-40, they can only deduct a total of $28,000 from the PA wages of the spouse who has taxable income. The spouse without PA taxable income cannot deduct any 529 contribution. Thus, the tax savings is reduced to $860.
Example 5: Only one spouse works and that person makes at least $56,000 in taxable income. The other spouse receives $9,000 in taxable interest and dividends. Each spouse contributes $14,000 from a joint bank account to each child’s 529 plan. As in the above examples, assume that the couple has made a $56,000 contribution to both 529 plans. However, on the couple’s PA-40 they can only deduct a total of $37,000. The W-2 wage earner is entitled to a $28,000 529 contribution and the non-working spouse is entitled to deduct $9,000, the amount of PA taxable income of the second spouse. Thus, the tax savings is $1,136 in this scenario..
Example 6: Assume the same facts as in example 5, except that the non-working spouse receives $9,000 in federal tax exempt interest and dividends. Although the non-working spouse has the exact same amount of interest and dividend income earned, this income is not subject to PA taxes and thus the non-working spouse has no taxable income for PA-40 tax reporting purposes. Accordingly, that spouse is not entitled to a PA 529 plan deduction. The couple is limited to the W-2 wage earner’s 529 contribution of $28,000 resulting again in a tax savings of $860.
Lesson learned: When making 529 plan contributions to reduce PA taxable income, you need to understand PA’s tax rules to maximize your tax savings. To maximize the 529 deduction for PA tax deduction purposes, each spouse must have PA taxable income equal to exceeding the amount of the 529 contribution and the contributions must come from each spouse’s separate bank account or from a joint bank account.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
