CollegeCounts offers tax advantages for college savers

Save with great tax benefits

When you invest with the CollegeCounts 529 Fund, you benefit from multiple tax advantages that could help you accumulate more dollars for college. For additional information see the Tax Q&A.

Each year, Alabama taxpayers can deduct contributions made to CollegeCounts up to:1

  • $5,000 single filers
  • $10,000 married, filing jointly when both spouses contribute
  • December 31 contribution deadline

Contributions and any earnings grow in the plan with no federal or state income taxes deducted each year, providing the potential for additional investment growth.

Withdrawals for qualified higher education expenses are free from federal tax.2 Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance; certain room and board expenses incurred by students who are enrolled at least half-time; the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution; and certain expenses for special needs services needed by a special needs beneficiary. Withdrawals for nonqualified expenses may be subject to state and federal taxes as well as an additional 10 percent federal tax penalty.

Certain sections of the Alabama income tax statute refer to definitions in Code Section 529, as amended, including the definition of “Qualified Higher Education Expenses.”  For years after 2017, amendments to Code Section 529 treat withdrawals for tuition in connection with enrollment or attendance at an elementary or secondary school, whether public, private or religious, with a limit of $10,000 per year, per child collectively from all 529 plans to be “Qualified Higher Education Expenses.”  Consequently, a Designated Beneficiary may be able to use the amounts in a Plan Account to pay for K-12 Tuition Expenses (as defined in the Program Disclosure Statement) without incurring adverse tax consequences. However, the Act (which has not been amended since adoption of the Code Section 529 amendments referred to above) only covers expenses at “eligible educational institutions.” The definition of this term in Code Section 529 does not appear to cover K-12 schools, although Internal Revenue Service Publication 970 provides that an “eligible educational institution” “can be either an eligible postsecondary school or, for amounts paid from distributions made after December 31, 2017, an eligible elementary or secondary school.” Publication 970 does not have the same authority as Code Section 529.

The Program recommends that taxpayers seek tax advice from an independent tax advisor with respect to their ability to use the Program to pay K-12 Tuition Expenses without incurring adverse tax consequences.

Federal Law Change (December 20, 2019). The Federal Consolidated Appropriations Act (2020) was signed into law by the President. It includes several new provisions related to 529 college savings accounts, effective for distributions made after December 31, 2018:

DISTRIBUTIONS FOR CERTAIN EXPENSES ASSOCIATED WITH REGISTERED APPRENTICESHIP PROGRAMS. Qualified higher education expenses shall include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).

DISTRIBUTIONS FOR QUALIFIED EDUCATION LOAN REPAYMENTS. Qualified higher education expenses shall include amounts paid as principal or interest on any qualified education loan (as defined in section 221(d) of the Internal Revenue Code) of the designated beneficiary or a sibling (as defined in section 152(d)(2)(B) of the Internal Revenue Code) of the designated beneficiary. The amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000 (reduced by the amount of distributions so treated for all prior taxable years).

Please consult with your financial, tax and other advisor to learn more about how the federal law changes and state-based benefits (including any limitations) would apply to your specific circumstances.

Contributions to an account are considered a gift from the contributor to the designated beneficiary and are generally excludible from the account owner’s taxable estate.  Amounts in an account at the death of the beneficiary are includible in the designated beneficiary’s estate.

An account owner’s contributions to an account are eligible for the annual gift tax exclusion, which is currently $15,000 per donee. 529 plans also allow for a special gift tax exclusion election. In general, this rule allows you to contribute up to $75,000 for each beneficiary in a single year without federal gift tax consequences—provided that you make no other gifts to the beneficiary in the same year or in any of the succeeding four calendar years. This election needs to be made on a federal gift tax return. Under this rule your contributions are subject to being added back into your taxable estate in the event of your death within the five-year period. You should consult your tax advisor regarding your situation.

1Individuals who file an Alabama state income tax return are eligible to deduct for Alabama state income tax purposes up to $5,000 per tax year ($10,000 for married taxpayers filing jointly if both actually contribute) for total combined contributions to the Plan and other State of Alabama 529 programs. The contributions made to such qualifying plans are deductible on the tax return of the contributing taxpayer for the tax year in which the contributions are made. In the event of a Nonqualified Withdrawal from the Plan, for Alabama state income tax purposes, an amount must be added back to the income of the contributing taxpayer in an amount of the Nonqualified Withdrawal plus ten (10%) percent of such amount withdrawn. Such amount will be added back to the income of the contributing taxpayer in the tax year that the Nonqualified Withdrawal was distributed. Please consult with your tax professional.

2Withdrawals used to pay for qualified higher education expenses are free from federal and Alabama state income tax. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance; certain room and board expenses incurred by students who are enrolled at least half-time; the purchase of computer or peripheral equipment, computer software, or Internet access and related services if used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution; and certain expenses for special needs services needed by a special needs beneficiary. The earnings portion of a non-qualified withdrawal is subject to federal income tax and 10% federal penalty tax. In addition, Alabama provides in the event of a non-qualified withdrawal an amount that must be added back to the income of the contributing taxpayer. The amount to be added back will be the amount of the non-qualified withdrawal plus 10% of the amount withdrawn.