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New MA State Tax Deduction for 529 Contributions

College Planning

Starting on January 1st, 2017, families just got another incentive to save for college expenses using the Massachusetts Educational Financing Authority’s (MEFA) U.Fund 529 Account. Individual contributors can now deduct $1,000 of 529 contributions on their Massachusetts state income taxes while married couples filing their taxes jointly will be allowed to deduct $2,000. This deduction is currently authorized through 2021, so individuals could possibly end up deducting $5,000 over the course of those 5 years, while married couples could deduct up to $10,000. 

While this deduction is a step in the right direction towards reducing the total out of pocket cost for attending college, the actual benefit may not actually be hugely significant for some people. That is because the Massachusetts state income tax rate is a flat 5.1% on wages, interest, dividends and long term capital gains. That means that if you are an individual who plans on maximizing this new deduction, you will save $255 between now and 2021 while married couples could save $510. 

All things being equal, this deduction would definitely be worth taking advantage of. However, not all 529 plans are created equal and because most 529 plans do not require investors to live in the state that is sponsoring the plan, Massachusetts residents are free to shop around to find the plan with the best investment options and lowest fees. According to Fidelity, the average 529 account has a balance of $21,000 and therefore the $102 deduction a married couple would receive every year represents 0.49% of the account balance. Therefore, it is still important to investigate the 529 plans offered by other states to determine if this deduction is worth foregoing investing in a plan with higher expected returns or lower fees. As a general rule of thumb, the lower the balance of your 529 account, the more beneficial the Massachusetts state tax deduction is. If you plan on contributing a relatively large sum to the account your best bet is likely to shop around for plans with the lowest fees and highest expected returns. 

Information about this deduction can be found here and that site also contains detailed information about every state’s 529 plan offering. Finally, if you need help planning for college or exploring different 529 plan options, please feel free to contact us.