When you invest with the Bright Directions College Savings Program, you have the potential to benefit from multiple tax advantages that could help you accumulate more dollars for college. For additional information, visit our tax center and consult with your tax professional.
Illinois Income Tax Deduction
Each year, Illinois taxpayers can deduct contributions made to Illinois 529 plans up to:1
- $10,000 per individual taxpayer
- $20,000 for a married couple filing jointly
December 31 deadline for contributions. To be deductible for a calendar year you must make the contribution before the end of that given calendar year. Contributions postmarked on or before December 31, will be treated as having been made in the year in which it was sent (postmarked).
Contributions may be completed online or mailed. Contributions that are mailed must be postmarked to Bright Directions no later than December 31, 2020 to be eligible for a 2020 deduction. Electronic contributions must be completed by 11:59pm Central time on December 31, 2020 to be considered a 2020 contribution.
Any contribution made between 3pm and 11:59pm Central time on Thursday, December 31, 2020, will be coded “Prior Year Contribution”.
Contributions addressed to Bright Directions and postmarked in 2020 but received in 2021, will be invested on the day the check is received and will be coded as a “Prior Year Contribution”.
Contributions and any earnings grow in the plan 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 tax.2 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. Withdrawals for nonqualified expenses may be subject to state and federal taxes as well as an additional 10 percent federal tax penalty.
*CAUTION – Illinois Qualified Expenses do not include expenses for:
tuition in connection with the Beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school. The amount of cash distributions for such expenses from all 529 qualified tuition programs with respect to a Beneficiary shall, in the aggregate, not exceed $10,000 during the taxable year;
tuition, fees, books, supplies, and equipment required for participation in an Apprenticeship Program;
payments on Qualified Education Loans of the Beneficiary or a sibling of the Beneficiary, subject to a $10,000 aggregate limit.
If a withdrawal is made for such purposes it may be a Federal Qualified Withdrawal and not be included in income for federal and Illinois purposes, but if an Illinois income tax deduction was previously claimed for Contributions to the Account all or part of that deduction may be added back to income for Illinois income tax purposes.
Please consult with 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.
1An 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 Directions College Savings Program, the Bright Start 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.
2Withdrawals 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.