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Tax Advantages of Virginia529 Accounts

Tax–free earnings

Earnings on Virginia529 accounts grow federal and state tax–deferred and are excluded for income tax purposes when used for qualified higher education expenses. You pay no income tax as your contributions grow and no income tax when you use the funds for the beneficiary’s qualified higher education expenses.

Virginia state income tax deduction

Virginia529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carryforward to future tax years, subject to certain restrictions. Those age 70 and above may deduct the entire amount contributed to a Virginia529 account in one year.

Examples1

  • Virginia529 account owner Mr. Smith contributed $8,000 dollars to his account in 2016. He may deduct $4,000 on his 2016 Virginia state income tax returns and $4,000 on his 2017 Virginia state income tax returns.
  • Virginia529 account owner Mr. Jones contributed $4,000 to his account for one child and $4,000 to a second account for another child in 2016. Mr. Jones may deduct the total $8,000 on his 2016 Virginia state income tax returns.
  • Virginia529 Account Owner Ms. Henry, who turned 70 in 2016, contributed $10,000 to her 529 account in 2016. Since she is at least 70 years old in 2016, she may deduct the entire $10,000 contribution on her 2016 Virginia state income tax return.

Favorable gift tax treatment

Contributions to Virginia529 accounts are treated as a completed gift by the account owner to the beneficiary. This means contributions up to $14,000 a year, or up to $28,000 if married, are gift tax free. Additional gifts made to the beneficiary in the same tax year must be taken into account for purposes of determining the $14,000 (or $28,000) limit has been met. You may also elect to take advantage of a special five-year averaging provision which exists for Virginia529 accounts. This means a single $70,000 contribution or $140,000 if married and filing jointly may be treated as if it were made over a five-year period. Additional contributions are permitted beyond these limits; however, such contributions may be subject to gift tax. You should consult your tax advisor regarding the specific tax consequences of additional contributions.

1. The examples are provided for illustrative purposes only and are not meant to provide you with tax advice. Your tax consequences depend on your individual circumstances. You should consult your own tax advisor regarding specific tax consequences of using the deductions in the manner described above.