NC parents losing tax deduction for college savings

Under the overhaul of the tax system state lawmakers approved in July, the deduction for payments into the college-savings program will be eliminated as of Jan. 1.

Nearly 70,000 taxpayers participate in the NC529 Plan, which, like 529 plans offered elsewhere, provides tax-free earnings on investments in an account as long as the money is used to pay for college expenses.

Susan Moore, whose son, Alex, is a junior at Word of God Academy in Raleigh, said she's disappointed by the loss of the state tax deduction.

"We've been saving for college for a long time for Alex," Moore said. "We'll still keep saving."

The deduction of $2,500 for single filers and $5,000 for a joint return amounted to only a few hundred dollars in tax savings a year, but financial adviser Gerald Townsend said it made a difference for many taxpayers.

"This was a carrot to invest in a North Carolina plan," Townsend said.

Many states offer tax deductions for their own 529 plans, and the market is very competitive. Townsend said North Carolina's plan might not fare so well without the deduction because its returns aren't among the best.

The larger the plan is, the more leverage it has to offer consumers a better value, he said. Big 529 programs like those in Alaska and Utah are rated among the best by investment firms. 

"So now it really becomes, are there other states that have plans that either offer better investment choices - perhaps just more investment choices, packaged differently - or have lower costs potentially than a North Carolina plan? Because now there's no tax reason to stay in North Carolina," he said, 

There's no rush to move money out of an NC529 account, Townsend said, because it's still racking up tax-free earnings.

Still, Moore said she plans to take a look at other 529 plans in the next year. 

"That's a possibility. The tax deduction does make a difference. It's nice to have that at the end of every year," she said.

The College Foundation of North Carolina, which operates the NC529 Plan, will use a scholarship contest to help offset the loss of the state tax deduction.

Shera Hube, CFNC's vice president of marketing and savings, said the organization will give away a $529 scholarship in each of North Carolina's 100 counties.

CFNC also will promote the plan's other tax benefits, Hube said.