If you’re a resident of New Mexico and plan to save for your child’s college tuition, it’s important to know the tax benefits of being a contributor to one of the state’s Section 529 college savings plans. These accounts can reduce the stress of applying for financial aid or searching for scholarships.
What Is a Section 529 College Savings Plan?
Section 529 plans are accounts that offer tax advantages for educational saving and allow families to begin contributing to a child’s college fund as soon as a baby is born. Such accounts can receive contributions from parents, family members, and friends (to a certain dollar amount each year), and grow free of taxation. All withdrawals used for qualified educational expenses are also exempt from federal income tax, and many states have begun waiving their taxes, as well. As defined by the U.S. government, a 529 plan is:
529 Plans Specific to New Mexico
New Mexico has dozens of colleges and universities, with the average annual tuition, books, and housing costs averaging around $3,620 (in-state), $8,029 (out-of-state), or $25,001 (private) depending on the type of institution in which a student is enrolled. New Mexico’s 529 investing has some distinct advantages over other states: Tax deduction is unlimited. The state is one of only four in the country to provide an unlimited state deduction for contributors to its 529 plans. This is especially beneficial for taxpayers who contribute more than the state’s standard tax deduction of $6,350 per year for a single person. Tax deduction is an “above the line” income adjustment. This means residents can consider their contribution when deciding on the option to itemize or take the standard deduction. The taxpayer’s contributions to the 529 plan will decrease taxable income regardless of whether the taxpayer decides to take the standard or itemized deduction.
Benefits of a 529 Plan
The New Mexico Higher Education Department (HED) has outlined some of the other benefits of 529 plans, including:
Savings advantages such as tax-deferred accumulationFederal and state tax-free earnings for qualified withdrawalsSpecial “gift” tax treatment
Additionally, 529 plans offer personal control and flexibility over assets and beneficiaries. These funds can also be used for K-12 education costs. New Mexico’s HED points out that very few students receive full scholarships to college. As a result, families must devise a multi-pronged approach to pay for a child’s higher education. This often includes student loans and financial aid as well as savings plans. Because money invested in a 529 college savings plan has the ability to grow tax-free, these funds can provide a substantial savings benefit over many years.
Value
New Mexico residents trying to decide whether to use one of the state’s college savings plans or another state’s 529 plan need to account for the potential tax savings of contributing to their in-state plan. Considering that the top New Mexico income tax rate is 4.9%, each $1,000 contribution can potentially save a taxpayer up to $49 at tax time. Currently, New Mexico does not offer a tax deduction for contributing to any other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account. Consult with a tax advisor if you have questions about the most appropriate college savings plan for your family based on your income, tax status, and the number of students you intend to support.
