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 2020 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
Qualified higher education expenses include:
- tuition and 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
- certain expenses for special needs services needed by a special needs beneficiary.
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