South Carolina’s Future Scholar college savings plan comes with state income tax benefits, it’s not just for college, and contributions can be made retroactively.
That means taxpayers who contribute to a Future Scholar account by April 18 can count it as a 2022 contribution and reduce their taxable income on last year’s state return by the same amount.
For many taxpayers, that would be like getting 7 percent back. South Carolina’s top income tax rate of 7 percent applies to all taxable income over $16,040, for single filers.
The money contributed can be withdrawn with no waiting period and used without tax or penalties to pay eligible expenses, including higher education costs, K-12 school tuition, and up to $10,000 of student loan debt.
Future Scholar (futurescholar.com)is the name of South Carolina’s 529 plan. It functions like a 401k retirement plan but for education expenses.
Money in a Future Scholar account can be invested in stock and bond funds — the gains are free from federal and state income taxes if used for eligible expenses — or it can sit in a safe money-market type account.
One thing that makes Future Scholar different from some 529 plans is the ability to claim a state tax deduction for contributions, even if the money is quickly withdrawn.
Another is that South Carolina is among only a half-dozen states where taxpayers can make prior-year contributions to a 529 plan. They could potentially make a prior-year contribution the same week they file their 2022 income tax return.
When I first wrote in 2008 about how South Carolina taxpayers could put money into the state’s 529 plan, take it right back out (for eligible expenses) and claim a tax deduction, it was a little-known loophole.
Since then, the allowed uses for 529 plan funds have only grown due to U.S. law changes.
The federal tax legislation in 2017 allowed people with 529 plans to withdraw up to $10,000 per student, per year, for “expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.”
So, someone with two children in private school could save $1,400 on their South Carolina income tax bill by contributing $20,000 to 529 plans, before taking those funds back out to pay tuition bills.
Now, people can contribute far more than that. The per-beneficiary limit is a whopping $540,000 in South Carolina, which makes Future Scholar a potential tax-avoidance tool for the wealthy. But no matter how much goes in, to avoid taxes and penalties the money must be used for eligible education expenses.
The federal SECURE Act in 2019 added registered apprenticeship programs to the eligible expense list, and allowed for up to $10,000 from a 529 plan to be used for paying student loan debt. That’s a $10,000 lifetime limit, not a per-year limit.
Here’s how that can work. Let’s say someone with student loan debt has been diligently saving money during the long pause in federal repayments that began in March 2020 and will likely end this summer.
By putting that money, up to $10,000, in a Future Scholar account as a 2022 contribution, they could count it as a deduction on their 2022 state income tax return. Then they could take the money back out and use it to pay the loan debt with no penalty, after saving money on their taxes.
For college savers, contributions can be left to grow for years, and any investment gains are tax-free if used for eligible expenses. If funds are withdrawn for nonqualified expenses, that can trigger a 10 percent federal penalty and taxes on any earnings.
Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.
