Pennsylvania State Tax Tip: Deduct Your Contributions to a 529 College Savings Plan

As an added incentive for saving for your child's college education, Pennsylvania residents may now deduct any contributions to a 529 College Savings Plan from their taxable income in determining their Pennsylvania state taxes. Many states limit this deduction to contributions to their own state's 529 plan, but Pennsylvania has allowed all state taxpayers to use this deduction, regardless of which state they have chosen to invest in. This deduction can save your hundreds of dollars on your Pennsylvania state tax bill while allowing you to grow your savings tax-free for any qualified college expenses.

Here's how it works: If you made a contribution to either the Pennsylvania Tuition Account Program (TAP) or to any state's 529 College Savings Plan in 2006, you can enter this amount as a deduction on Line 10 of your Pennsylvania state tax form. Choose the code T if you are only claiming a Tuition Account Program deduction or choose code C if you are also claiming Medical or Health Savings Account deductions. You will also need to fill out Schedule O, detailing the amount of contributions made as well as the beneficiary's information. Note that the most that can be deducted is $12,000 per beneficiary, per taxpayer (spouses may deduct an additional $12,000 per beneficiary).

Potential savings: The Pennsylvania state tax rate is 3.07%, so if you made a $3,000 contribution to your child's college savings plan in 2006, you will see a tax savings of $92.10. Obviously, the more that you have contributed to college savings plans in 2006, the more savings you will see. If you haven't made contributions to a 529 College Savings plan in 2006, you will want to consider doing this in 2007 since this new Pennsylvania state tax deduction will allow you to "double-dip" in tax savings. First, you are seeing an instant state deduction for making this contribution, but more importantly, you'll see tax savings when you withdraw from the account when using it for college expenditures.

If you're trying to determine which state's plan would make sense for you and you live in Pennsylvania, you'll want to look at the state's newest option - the PA Direct Investment Plan. Managed by Vanguard, this plan has low fees and many investment options, as compared to the previous direct investment program, which was managed by Delaware Investments (Delaware Investments still manages the 529 Advisor Investment Plan). Of course, you'll want to make your final investment decision based on your individual risk tolerance.

Link to PA Direct Investment Plan: https://pa529direct.s.upromise.com/

Link to additional 529 Plan information: http://www.associatedcontent.com/article/90091/entering_the_complex_world_of_529_plans.html