education

6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from SavingforCollege.com.

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

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Important Dates In American Tax History Post-1812 Up to The Civil War

We start today’s journey through tax history the year after the war of 1812 with Great Britain. Congress doubled the tariff schedule to fundraise the war.  But it turns out, trading across oceans is very difficult when your navy is just 18-years-old. Comparatively, the British fleet had the power of being the world’s most powerful seafaring nation.

Photo by Dirk Spijkers on Unsplash

Photo by Dirk Spijkers on Unsplash

It was able to effectively strangle commerce on the eastern seaboard, which made up the entirety of young America’s trade paths with other parts of the world.

1813

Due to the conflict and Congress’ need to raise revenue to continue to fund the war, it levied about $3 million in internal taxes on things like refined sugar, distilled spirits, and carriages. These were designed to be repealed after the war was over. To collect this tax, the federal government offered a 15% tax discount for those states that collected the taxes themselves, which caused many states to take advantage of the arrangement.

1816

With the conflict with the British and French behind them, Congress passed the Tariff Act of 1816, which levied 25% duties on items to encourage local manufacturing.

1819

This was the year of the Panic of 1819, which is the crisis sparked by a drop in world agriculture prices. This caused more protectionist policies to be pushed to keep cheap European agricultural interests from flooding the market.

1820

The house pushed a bill that would enact a 5 percent tariff on cotton, wool, clothing, iron, and hemp. The law was never enacted, but it set the stage for similar laws to be passed. The North was split on its opinions of the tariff, but the South was firmly against it. It was losing its voting power in Congress regionally as the population dropped slightly there and rose slightly above the Mason-Dixon line.

1824

Henry Clay served as speaker of the House this year and appointed John Tod, a die-hard protectionist, to head the Committee on Manufactures. He implemented a 35% tariff on imported iron, wool, cotton, and hemp.  This caused American-produced goods to finally be cheaper than the British goods, which in turn stirred up support in states that had been against protectionist measures in the past.

1828

This year, the tariff on imported goods expanded to cover hemp, wool, fur, flax, liquor, and imported textiles. It was also raised to 50% of the value of the goods. This was good for the north and Ohio valley, but bad for the South. They didn’t get the benefits of manufacturing these products in their region. The reduction of cheap British goods isn’t a positive either, as the South relied on the British to buy their cotton in exchange for those cheap goods.  That cotton was often sold back to the states as finished goods, so the tariffs significantly disrupted this system.

1832

In July, Congress reduced tariff rates slightly, but kept the high rates on products like iron and manufactured cloth. South Carolina passed a Nullification Convention, which declared the tariffs unconstitutional and ceased collecting them in the state.

1833

In response, Jackson passed the Compromise Tariff, which reduced tariffs automatically between 1833 and 1842. Simultaneously, he levied the Force Bill, which said that the president could use force and arms to collect tariffs.

1837

By 1837, an extended economic depression had settled in, driven by a financial panic from the reduction of British investment in the states. The depression lasted until 1843. This caused the Whig Party to gain national support for some of its economic development strategies (which included higher tariffs).

1840

In 1840, the Whigs won the presidential seat and implemented revenue tariffs that were to be partially distributed to the states to build roads and canals.

1842

The Compromise Tariff was abandoned due to the states’ need for revenue and many tariffs were returned to their prior rate or slightly lower than the prior rate.

1846

The Walker Tariff was passed, which slashed all duties to the minimum necessary for revenue. In Britain, Parliament repealed the Corn Laws, which levied tariffs on imported bread. Both measures set the stage for freer world trade.

1848

The custom and commerce programs were running so well that the American government was able to pay off the entirety of its debts in the Mexican War before the Civil War even started.

1850

Slavery was becoming a highly political issue and the Northern and Southern states were growing increasingly polarized. The economy was booming but the interests of the Northern and Southern states grew increasingly misaligned.

1857

Tariffs were lowered even further by the Democratic party, which plunged the nation into an economic panic. Government revenues plummeted 30%, which caused Republicans to demand tariffs be increased.

 

Important Dates In Post-Revolution American Tax History

The Revolutionary War was sparked in part by the British imposing taxes on the American colonists without their permission or consent.

Once the colonists had freed themselves from British rule, it was time to establish a government that could pay the debts it had incurred during the conflict.

Photo by Patrick Fore on Unsplash

Photo by Patrick Fore on Unsplash

1777 – Articles of Confederation

This was the first constitution of the newly formed United State. It favored decentralization of power, which means that Congress was not given the power to tax.

1781  – Report on Public Credit

Robert Morris, Superintendent of finance, wanted the federal government to own the debt it incurred then issue interest-bearing debt certificates while imposing tariffs and internal taxes.

His proposal was shut down by numerous states over the next few years.

1787 – Ratification of the Constitution

The ratification of the Constitution shifted the focus of power to the federal government and away from individual states.

This gave the federal legislature the power to impose tariffs and coin money, along with the flexibility to collect excises and levy taxes directly on individual citizens.

1789 – Tariff of 1789

This tax bill included the original 5% duty on imports, as well as a list of special items that would be taxed at specific amounts.

1790 – Report on Public Credit

This new tax plan worked on two basic principles:

  • Redemption – Congress would redeem at face value all the securities issued by the Confederation government. These old notes would be exchanged for new government securities with interest of about 4%. This plan aimed to intertwine the wealthy Americans who had financed the initial government with the new government.

  • Assumption – The national government would take on outstanding war debts of the states. This would concentrate the nation wealth into the hands of the wealthy merchant class so they would be able to invest in the nation’s economy and other critical innovations.

1791 – Whiskey Excise Tax

This was a tax specifically for spirit distillers and imposed a 7 cents to 18 cent per gallon tax. This was not a popular tax, as spirits were often used as a form of currency out west.

1794 – Uprising Quelled

North Carolina and Western Pennsylvania were in a state of civil unrest after being cited by the federal government for dodging taxes.

The federal government forced the states to send militia to occupy these territories and take down any organized resistance.

President Madison appealed to Congress for a Declaration of War against Britain as the tension between the two countries reached a head.

There was a lot of conflict over fundraising for the war, but Congress eventually settled on doubling the tariff schedule.

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.