Did you know that Massachusetts has a state tax deduction for those who save for college in a designated college savings account? We talked to MEFA’s Director of Savings Programs, Anna Devlin, about the deduction and how it works. Anna gave us all the key details on its benefits, what plans qualify, who can take advantage of it, and more.
SC: What is the amount of the Massachusetts college savings tax deduction?
AD: The amount of the deduction is up to $1,000 for a single filer or up to $2,000 for those who file married filing jointly.
SC: How does the deduction work?
AD: When you file a Massachusetts tax return for the applicable year, you should list the amount of your eligible contribution to a college savings account (such as your U.Plan Prepaid Tuition Program or U.Fund 529 College Investing Plan account) on your return. The amount you list would be the lesser of your total contributions during the applicable year or $1,000 (if a single filer) or $2,000 (for married filing jointly filers.) If you file manually, the amount belongs under “other deductions.” If you use tax software, the program will ask about 529 deposits (which for this purpose can include contributions to a U.Plan account, though the U.Plan is not a 529).
SC: Which college savings plans qualify?
AD: A Massachusetts resident who makes the deposit into a U.Fund or U.Plan account can qualify for the deduction.
SC: What documentation do people need to maintain?
AD: Savers should keep the confirmation(s) they receive when they make the contribution(s) they plan to deduct, or they can keep an account statement(s) showing the amount and date of such contribution(s).
SC: Can people take a deduction per beneficiary?
AD: No, the tax deduction is taken per tax filer, not beneficiary. So if the parents have 5 children and make contributions into all of their accounts, the most they can deduct on their tax form is up to $1,000 each if they file separately or $2,000 on their joint tax return if they file jointly.
SC: Can someone other than the parent (grandparents, aunts/uncles, etc.) take the deduction?
AD: Yes, but documentation of the contribution may be trickier. If the non-parent opens an account in their own name and contributes to that account, the non-parent will receive and should retain a contribution confirmation or statement showing their name, which can serve as documentation of their contribution. If the non-parent contributes the money to another owner’s account and the Massachusetts Department of Revenue (DOR) seeks evidence of the contribution, the non-parent may need to ask the other owner for documentation that the account received such contribution, and may also need to provide a canceled check or bank statement evidencing that the non-parent made the contribution to such account.
SC: Are rollovers to the U.Fund from another state’s plan eligible?
AD: There is no clear guidance on this. The Massachusetts Department of Revenue (DOR) has not spoken to the matter. A taxpayer can in good faith claim the deduction for a rollover, but it is possible that if the return is audited, the deduction could be disallowed if DOR decides that the legislation was not intended to apply to rollovers.
SC: Are there any circumstances in which a deduction that was properly taken can get reversed?
AD: Yes, there is a deduction “recapture” concept if an amount for which a deduction was taken at the time of contribution is later withdrawn from the U.Fund or U.Plan for a reason other than to pay qualified higher education expenses (as defined in section 529(e)(3) of the federal tax code) or because of the account beneficiary’s death or disability or receipt of a scholarship. The amount of a previously taken deduction that is “recaptured” should be added to the taxpayer’s Massachusetts state income for the year of the applicable withdrawal from the account. The Massachusetts Department of Revenue (DOR) has not provided guidance on how a taxpayer should match a contribution for which a deduction was taken with a withdrawal from an account that also contains contributions for which no deduction was taken. If you have taken a deduction and later make a withdrawal for purposes other than the payment of qualified higher education expenses or because of the account beneficiary’s death or disability or receipt of a scholarship, consult your tax advisor on whether any recapture income needs to be listed on your tax form and, if so, where.
For more information on either the Massachusetts 529 College Investing Plan, the U.Fund, or the Massachusetts Prepaid College Tuition Program, the U.Plan, visit our College Savings webpage or call us at (800) 449-MEFA (6332)
