Image courtesy of Pixabay.com

Image courtesy of Pixabay.com

Iowa has changed a rule relating to when taxpayers can deduct contributions to College Savings Iowa (Iowa’s Section 529 Plan).

(For more details about 529 plans, see this post.)

Background

Amounts put into a 529 plan are not deductible at the federal level, but are deductible (up to certain limits) on the Iowa tax return.

For 2015, the deduction limit is $3,163 per parent per child. So a married couple with one child could deduct up to $6,326 of contributions into College Savings Iowa.

What’s the New Rule?

In the past, the deduction was based on amounts contributed to the plan during the calendar year. The new rules say taxpayers can put money into a 529 plan up to the due date of the Iowa tax return (April 30) and still deduct it on the prior-year’s tax return.

Example

Joe has a College Savings Iowa account for his child. Joe paid $1,000 into the account in December 2015 and paid another $1,000 into the account in January 2016.

Under the old rules, Joe would have deducted the $1,000 December contribution on his 2015 tax return; the $1,000 paid in January 2016 would have been deductible on Joe’s 2016 return. Under the new rules, Joe can choose to take both contributions as a deduction on his 2015 tax return, since the January contribution was made before April 30th. 

Note in our example above: the new rules give Joe the choice of taking the January 2016 contribution on his 2015 tax return, but he’s not required to do that. He could choose to apply the “old” rules and just deduct the December 2015 contribution on his 2015 return and the January 2016 contribution on his 2016 return.

Effective Date of New Rule

The new rule went into effect for 2015 tax returns and future years.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”