The Oregon State legislature has decided to limit the tax benefits of contributing to an Oregon 529 College Savings Plan. The new rules go into effect in 2020:
- Instead of a tax deduction, which counts against your income, there will be a minimal tax CREDIT. A tax credit directly reduces your tax liability, on a 1 for 1 basis. A deduction, on the other hand, is most valuable if your income is high.
- The current deduction for a couple filing jointly is $4865, but this will be reduced to a $300 tax credit in 2020. Even then, if your income is high, you will not qualify to take the entire credit.
- Although this is bad news for those who want to save aggressively for one of the most expensive endeavors we ever undertake – college – there is an opportunity to accelerate your saving – IF YOU CONTRIBUTE BY DECEMBER 31, 2019. By contributing about $25,000 now, you can take the full $4865 tax deduction in this year and each of the next four years, with some restrictions. It is possible that you will also be able to take the tax credit in each of the next four years.
- Amounts are less for single filers; deductions and credits are totals, so you cannot take the full deduction multiple times for multiple accounts.
- Information on the plan changes is here: https://www.oregoncollegesavings.com/faqs/is-there-an-oregon-income-tax-deduction
Oregon’s plan has become less generous incrementally. When the Tax Act loosened rules for using the 529, allowing the funds to be tapped for grade school and other tuition, this state did not follow. Oregon still restricts the use of the 529 to post secondary education. Several states allow in-state tax deductions for contributions to out of state plans – not Oregon. Our plan has also been through an unusual number of manager changes. The 529 still gives you the benefit of tax deferred savings for college, but it does seem to us that limiting the benefits of saving for college is not a wise direction.
Talk to your accountant posthaste if you intend to pursue the carry forward idea; there are nuances to be aware of.