For some reason, a ton of people wait until the very last second to complete the tasks that will save them some money once tax time comes around. Do a quick search or check out your favorite personal finance website and you’re sure to see at least one list about year-end tax planning tips/strategies/savvy moves. I assume there’s a reason for that – because they know everyone is searching for it.
The funny thing is that people could have been taking advantage of almost everyone of those tips throughout the year rather than waiting until December and having a deadline push them to make sure that they get it done. There isn’t really anything special about the end of the year when it comes to saving money on taxes except it gives you a deadline to complete most of these things by and it’s the time when most people are thinking about making charitable contributions that could reduce their taxes.
Luckily, those of us who live in Indiana have a “year-end” tax planning strategy that provides benefits beyond just tax savings for this year. Actually, that’s a lie. You can complete this strategy at any point throughout the year and still receive the benefits – it’s an “anytime” tax saving strategy.
Might as well join the crowd, right? But, I only have one tip for you, not a full list. And it (mostly) only applies to those who file taxes in Indiana.
Enter The 529 Savings Plan
The 529 Savings Plan was originally created in 1996 as a tax-advantaged post-secondary education savings plan for college, technical school, and vocational school, but has recently been changed to allow the money to be used for primary and secondary education tuition as well (up to $10,000 per student per year).
The tax advantages of a 529 plan come from investing the money and using it for education expenses. You can contribute money to a 529 Plan, choose an investment option and allow the money to grow tax-deferred, and then pull out the money tax free, if you use it for qualified education expenses. Withdrawing money from the account to use it for anything besides qualified education expenses will result in having to pay taxes on the earnings portion of the account as well as paying a 10% penalty.
The Indiana 529 Plan Advantage
In addition to being able to save in a tax-advantaged account for a loved one’s education, Indiana offers a tax credit for contributing to a 529. As of 2018, you can receive a 20% tax credit on up to a $5,000 contribution to an Indiana 529 Savings Plan if you are a resident of and file your state taxes in Indiana.
For example, if you contribute $5,000 to an Indiana 529 Savings Plan and are an Indiana filer, then you will receive a $1,000 credit on your Indiana income tax ($5,000 x 20%). This is the maximum credit available. If you contributed $1,000 to the plan, then you’d receive a $200 tax credit.
A tax credit is better than a tax deduction (you receive deductions for things such as charitable contributions and saving to your retirement account) because a credit reduces your tax bill dollar-for-dollar while deductions only marginally reduce your tax bill.
That’s an awesome benefit for helping someone receive further education and helping to reduce the burden of paying for it.
If you’re looking for a last minute tax strategy, just want to save some money on qualified education expenses that you’re already paying for anyways (why wouldn’t you), or even need a holiday gift idea (although it may not be appreciated until much later), then you might want to consider contributing to a 529. However, you need to be certain that your contributions to the account are initiated via electronic funds transfer by December 31 to be eligible. Otherwise, you’ll lose out on your 2018 tax credit and will have to settle for a credit in 2019 and beyond.
When you’re done making sure that you help fund someone’s education and receive a tax benefit for doing so in 2018, you might as well set up automatic contributions for 2019 so that you don’t have to rush through this same process again next December. Remember, this is an anytime tax saving strategy, not a year-end tax saving strategy.
If you’re an Indiana tax filer and you pay for qualified education expenses at a qualified primary school, college, technical school, or vocational school and you’re not contributing to an Indiana 529 plan, then you’re missing out on a tax credit that you should be taking advantage of. Even if you have a child who is a senior in college and you plan on paying for their final semester in the spring, you could still benefit by contributing to a 529 plan and receiving the tax credit in 2018. Don’t be the person who misses out on tax savings because you waited until the last minute to do something that could have been done at anytime throughout the year.
