First let me say that we are not offering tax advice here. You should seek out the help of a qualified tax advisor in your home state that can help verify the opportunity we are pointing out here.
That being said, I was reading some information on a website called www.savingforcollege.com, which evaluates all state 529 savings plans, and I spotted an article 529 plan state tax deduction loophole. It is authored by Mark Kantrowitz, a highly recognized authority in the area of college admission and financial aid.
It points out that 34 states and the District of Columbia offer some level of state tax benefit for 529 college savings contributions. The tax benefit can come in the form of a tax credit, which reduces your taxes dollar for dollar, or a tax deduction on your state tax return.
What it also points out is that except for four states (Michigan, Montana, Minnesota and Wisconsin), there is no prohibition for making a contribution to a 529 account and then immediately taking a qualified withdrawal to pay for college expenses.
So, say its May 1, and you have a tuition bill coming up in June for $10,000. You have the money to pay the bill sitting in a checking account. What this article is saying is that you could take the $10,000 that you know you were going to spend on college, place it in your home states 529 account to benefit your student, and then when the tuition bill is due, make a withdrawal to pay that bill.
So even though your money has only been in that account for a short time, this article is saying that you will have locked in a tax benefit that might help your state taxes for that calendar year.
Obviously, there are a lot of caveats to this. One is that you have an already used up your state tax benefit by making some other contribution earlier. That is why we suggest you seek out qualified tax advice before engaging in this. However, assuming it works, this could be a way of saving several hundred dollars a year in state taxes.