Giannoulias touts tax benefits of state's college savings plans

Incentives, improvements make plans more appealing to investors saving for college

Monday, October 29, 2007

Saving for college is always a good investment, but enrolling in one of Illinois’ tax-advantaged college savings plans before the end of the year will reduce next April’s tax bite, Illinois State Treasurer Alexi Giannoulias said today.

Illinois residents who contribute to either of the state’s 529 plans – Bright Start or Bright Directions – qualify for a state tax deduction.

“Opening an account or adding on to one through a contribution before January can result in a lucrative tax deduction,” said Giannoulias, who is making an end-of-year push to alert Illinois residents of the programs’ tax benefits. Giannoulias noted the recent changes to Bright Start have resulted in lower fees and more highly rated investment funds.

“When it comes to college savings plans, Bright Start is now one of the best in the nation, giving families the biggest bang for their buck to combat rapidly rising college costs,” Giannoulias said. “And now is the time of the year that Illinois taxpayers should begin exploring tax-planning strategies that will give them some tax relief next spring and in years to come.”

Under Illinois law, state residents can deduct contributions to Bright Start and Bright Directions up to $10,000 or $20,000 for married couples filing joint tax returns.

Contributions to Bright Start and Bright Directions are subtracted from each taxpayer’s adjusted gross income on Illinois tax returns. For example, if your adjusted gross income is $45,000 and you contribute $5,000 a year into a 529 plan, your taxable income in Illinois would amount to $40,000. Based on Illinois’ 3 percent state income tax rate and the $5,000 contribution to a 529 plan, you would receive a $150 refund from the state next spring.

Furthermore, if you put the $150 refund you receive back into your 529 account every year for the next 10 years, you would realize an additional $2,023 ($1,350 in money invested and $673 in interest).

It’s not just parents who can take advantage of the state’s income tax deduction through saving for college, Giannoulias noted. Grandparents and others who put money away money into a 529 plan will earn a deduction.

“Anybody – parents, grandparents, other relatives and friends – can use the gift of a 529 contribution to achieve bigger goals of building a college fund for someone special and reducing their own tax bills,” Giannoulias said. “These are the only gifts to your nearest and dearest that are tax deductible.”

A contribution to a college savings plan also makes perfect sense as a gift around the holidays, Giannoulias said.

“Right now, it may not have the same effect on a child as an action hero or doll, but it’s something the family and the child will cherish long after their toys are boxed away in the attic,” he said.

Last week, the national College Board issued a report showing that the price of college is rising faster than inflation, climbing 6.6 percent at a four-year public college. At four-year public schools, tuition and room and board average around $15,000. Those same costs amount to more than $30,000 at private schools.

Giannoulias also reminded account holders and contributors that it’s not enough to enroll in a 529 and sock away money, you have to actively take advantage of the tax breaks. According to a report issued by the U.S. Government Accountability Office, 27 percent of eligible income tax filers enrolled in 529 programs failed to take advantage of deductions aimed at helping defray college costs.

Almost every state offers some kind of 529 college investment program, named after Section 529 of the Internal Revenue Code. Money in a 529 can be used at accredited public and private colleges and universities anywhere in the U.S. as well as some overseas. Upon withdrawing the money for college expenses, you pay no federal or state income tax. Qualified expenses include tuition, books, and room and board. Administered by the Treasurer’s Office, Bright Start and Bright Directions each offer a combination of age-based, target and individual fund portfolios.

Bright Start is a $2.3 billion savings plan with nearly 150,000 accounts. Shortly after taking office this year, Giannoulias announced OppenheimerFunds, Inc. would take over as Bright Start’s new fund manager. Since then, Bright Start’s fees have been significantly reduced, making them among the lowest in the nation. In addition, Oppenheimer has added more highly rated funds, more flexible investment options and introduced popular Vanguard Index funds. Morningstar, Inc. recently published an article about Bright Start entitled, “The New Gold Standard Among College Savings Plans?”  To learn more, visit www.brightstartsavings.com or call (877) 432-74444.

Bright Directions is Illinois’ financial advisor-sold 529 account plan, which boasts $287 million invested for nearly 26,000 account holders. It offers more than 35 different investment options and customized savings plans. It is rated among the top performing advisors-sold programs in the nation. To learn more visit www.brightdirections.com or call (866) 722-7283.