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30 September 2018

Virginia Beach 529 Tax LoopholeThe Virginia ABLE-Now program allows you to deduct up to $2,000 of contributions per year from your Virginia income taxes. Or you could exploit a simple trick created by the Tax Cuts and Jobs Act to increase the amount you are able to deduct from your Virginia tax return!

I have made no secret over the years of my fondness for the Virginia 529 program. They provide a valuable product at a good price. The investment selections in the College Invest program are top notch index funds with low fees and expenses. On top of that, they manage to be one of the few government agencies I find less than dreadful to work with. It’s actually pretty slick. You can do almost everything online with very few hassles, and I never sign off angry. If only the Virginia 529 team could take over the DMV!

The latest and greatest addition to Virginia 529 is the ABLE-Now account. It isn’t for college savings, but rather a vehicle for persons with disabilities to be able to contribute to their own maintenance and care without jeopardizing their access to public support programs (MEDICAID). It’s a great program for people with disabilities, so if you know someone with a disability and you don’t know about the 529 ABLE program - go find out more! (The ABLE programs are state specific, so if you are not a Virginia resident, find the ABLE program for your state.)

Congress authorized the ABLE accounts under section 529 of the Internal Revenue Code, the same section of the code that authorizes states to implement college savings programs. In a rare moment of clarity, the Commonwealth of Virginia General Assembly determined section 529 linkage was sufficient to have the highly successful Virginia 529 college savings plan folks also take on implementation and management of the Virginia 529 ABLE program. Virginia calls their 529 ABLE program the Virginia 529 ABLE-Now program.

One of the provisions of the Tax Cuts and Jobs Act (TCJA) - the federal tax reform for 2018 - allows taxpayers to roll 529 college savings plan money into 529 ABLE accounts. This opens up some possibilities and opportunities because there are differences between the tax benefits of the Virginia 529 college savings program and the Virginia 529 ABLE-Now program. Let me list the salient ones for this tax tip I am about to share:

  • Contributions (from all sources) to a Virginia 529 ABLE-Now account are limited to $15,000 per year. (A beneficiary can only have one Virginia 529 ABLE Now account.)
  • Virginia taxpayers can deduct contributions to a Virginia 529 ABLE-Now account from their Virginia taxes, limited to $2,000 per account. In other words, if you wanted to fund a Virginia 529 ABLE-Now account, the most you could put into the account in a single year is $15,000, and then you could only deduct $2,000 of it from your Virginia taxes. You can carry the remaining $13,000 over to the next year (and the next year, and the next year...) until you have deducted the entire $15,000 contribution.

However...

  • Virginia taxpayers can deduct contributions to a Virginia 529 college savings plan from their Virginia taxes, limited to $4,000 per account. (There is no limit to the number of accounts a beneficiary can have, but an account owner can only have one account of each type of 529 college savings plan per beneficiary.)

This sets up an opportunity to make contributions to a Virginia 529 college savings plan, take the larger tax deduction for making the contribution, and then rolling the money over to the Virginia 529 ABLE-Now program to be used for a person with disabilities. Let’s look at an example of how this would work.

Helen and Dale have a son, Tim, with a qualifying disability for the Virginia 529 ABLE-Now program. They assist Tim with opening a Virginia 529 ABLE-Now account. They want to contribute $8,000 to it, but they know if they do they will only be able to deduct $2,000 of that contribution from this year’s Virginia tax return. The other $6,000 will be carried over to future years, but they are planning to put $8,000 per year into the account. At that contribution rate they’ll never be able to get the tax deduction for all their contributions. Instead, Helen opens a Virginia 529 College Invest account with Tim as the beneficiary and Dale opens a Virginia 529 College Invest account with Tim as the beneficiary. Helen puts $4,000 into the account she opened and Dale puts $4,000 into the account he opened. They can now deduct all $8,000 from this year’s Virginia taxes. Later they can roll the money from the two Virginia 529 College Invest accounts into Tim’s Virginia 529 ABLE-Now account. Helen and Dale can deduct their entire contribution, and Tim has money he can use for his own support without impacting his ability to access MEDICAID if he needs it.

What Helen and Dale want to watch out for here is this pesky thing called the Step Transaction Doctrine. In the event they were audited (by Virginia), the Commissioner could determine that putting the money in the the Virginia 529 college savings plan was only done to serve the second step of rolling the money over to the Virginia 529 ABLE-Now account - and therefore the entire process materially constitutes a contribution to the Virginia 529 ABLE-Now account, with it’s lower deduction limits.

Such a ruling would be easy to avoid by leaving the money in the Virginia 529 College Invest program for a year or two. The investment choices within the College Invest program are quite good, and you could build a portfolio to mirror the same investments available in the Virginia 529-ABLE-Now account. You’d get the same return for the same risk and eliminate the possibility of losing the deduction to the Step Transaction Doctrine.

Virginia’s income tax rate is essentially 5.75%. By deducting $8,000 vice $2,000 each year from their Virginia taxes Helen and Dale would decrease their Virginia income tax bill by $345. Is that life altering money? Probably not. It is, however, a great guaranteed return on an investment of 20 or 30 minutes of your time to set up the accounts and execute the plan each year.

You'd probably also want to think twice before using the College America verson of the Virginia 529 college savings plan for this maneuver. College America is implemented through financial advisers, so there may be additional fees charged that reduce the value of the tax savings.

If you would like more information or to discuss the tax benefits of the Virginia 529 plans in greater detail, please contact me for a free initial consultation.

 

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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