Federal Tax Treatment of 529 Plans
States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.
For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.
To learn more about federal tax benefits for higher education, visit the IRS.GOV Tax Benefits for Education: Information Center
State of New Mexico Income Tax Benefits for College Savings
In addition to federal tax benefits, New Mexico residents can enjoy state tax benefits as well.
- You can deduct your plan contributions from your New Mexico Income. However, the total deduction cannot exceed the cost of attendance at the applicable eligible higher education institutions as determined by the Board
- Any earnings grow New Mexico state tax free
- Qualified withdrawals are exempt from New Mexico state tax. In case of nonqualified withdrawal, the earnings portion of the nonqualified withdrawal is considered to be income for New Mexico state income tax purposes. Also, amounts in a nonqualified withdrawal which are attributable to previous tax deductions are added back to the Account Owner's new Mexico State taxable income in the year of withdrawal
New Mexico residents should consult with a qualified tax advisor regarding the application of New Mexico and federal tax rules to their particular circumstances.