Bright Start 529 Tax Benefits
December 31 Deadline for Contributions
Contributions may be completed online or mailed. Contributions that are mailed must be postmarked to Bright Start no later than December 31, 2019 to be eligible for a 2019 deduction. Electronic contributions must be completed by 11:59 pm Central time on December 31 to be considered a 2019 contribution.
Any contribution made after 3:00 pm Central time on Tuesday, December 31 but before 11:59pm Central time on December 31 will post to your account on January 2, 2020, but will be coded a “Prior Year Contribution” and generally should be eligible for the 2019 state income tax deduction.
Contributions addressed to Bright Start and postmarked in 2019 but received in 2020, will be invested on the day the check is received – will be coded as a “Prior Year Contribution” and will be considered a 2019 contribution for tax deduction purposes.
Contributions and any earnings grow in your Bright Start account 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 and state income tax.2
IRS Publication 970 defines qualified education expenses as:
Expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time to be qualified.
- The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.
- Tuition and fees
- Books, supplies, and equipment
- Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible post-secondary school.
- Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.
- The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
- The actual amount charged if the student is residing in housing owned or operated by the school.
- The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)
Half-time student. A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.
K-12 Expenses. Federal law, but not Illinois law, permits an aggregate of up to $10,000 during a taxable year from all 529 qualified tuition programs for a Beneficiary to be used for tuition or connection with the Beneficiary’s enrollment or attendance at an elementary or secondary public, private or religious school. Such a distribution would be an Illinois Nonqualified Withdrawal and the amount of any deduction previously taken for Illinois income tax purposes (or a portion of such amount) would be added back to Illinois taxable income. Consult with your tax or legal advisor before making such distributions.
The earnings portion of a nonqualified withdrawal may be subject to federal and state income taxes, a 10 percent federal tax penalty, and Illinois may recapture prior tax deduction benefits. Please consult your tax advisor.
Gift and Estate Tax Treatment
Contributions to an account are considered a gift from the contributor to the designated beneficiary and are generally excludable from the account owner’s taxable estate. Amounts in an account at the death of the beneficiary are includable 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. 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.
1 An individual who files an individual Illinois state income tax return will be able to deduct up to $10,000 per tax year (up to $20,000 for married taxpayers filing a joint Illinois state income tax return) for their total, combined contributions to the Bright Start College Savings Program, the Bright Directions Advisor-Guided 529 College Savings Program, and CollegeIllinois! during that tax year. The $10,000 (individual) and $20,000 (joint) limit on deductions will apply to total contributions made without regard to whether the contributions are made to a single account or more than one account. The amount of any deduction previously taken for Illinois income tax purposes is added back to Illinois taxable income in the event an Account Owner takes a Nonqualified Withdrawal from an Account or if such assets are rolled over to a non-Illinois 529 plan. If Illinois tax rates have increased since the original contribution, the additional tax liability may exceed the tax savings from the deduction.back
2 Withdrawals used to pay for Qualified Higher Education Costs are free from federal and Illinois 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.back