Loans Student Loans Paying for College Tax Benefits of New Mexico's 529 College Savings Plans By Ken Clark Ken Clark Ken Clark is a former Certified Financial Planner (CFP) with over a decade of experience working in the financial planning industry. He is an expert on student loans, financial aid, and paying for college, and has also authored six personal finance books. Ken is a licensed family therapist specializing in money conflict among couples. learn about our editorial policies Updated on November 2, 2021 Reviewed by Margaret James Reviewed by Margaret James Twitter Peggy James is an expert in accounting, corporate finance, and personal finance. She is a certified public accountant who owns her own accounting firm, where she serves small businesses, nonprofits, solopreneurs, freelancers, and individuals. learn about our financial review board Share Tweet Pin Email Photo: Helen Cortez / EyeEm / Getty Images Student loan debt in the U.S. is on track to exceed $1.73 trillion in 2021. As multiple generations of young Americans struggle against the burden of this debt, state governments are being forced to search for better ways to support families who want to save money for their children's higher education. If you're a resident of New Mexico and plan to save for your child's college tuition, it's important to know the tax benefits of being a contributor to one of the state's Section 529 college savings plans. These accounts can reduce the stress of applying for financial aid or searching for scholarships. What Is a Section 529 College Savings Plan? Section 529 plans are accounts that offer tax advantages for educational saving and allow families to begin contributing to a child's college fund as soon as a baby is born. Such accounts can receive contributions from parents, family members, and friends (to a certain dollar amount each year), and grow free of taxation. All withdrawals used for qualified educational expenses are also exempt from federal income tax, and many states have begun waiving their taxes, as well. As defined by the U.S. government, a 529 plan is: "...a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as 'qualified tuition plans,' are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: prepaid tuition plans and education savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan." 529 Plans Specific to New Mexico New Mexico has dozens of colleges and universities, with the average annual tuition, books, and housing costs averaging around $3,620 (in-state), $8,029 (out-of-state), or $25,001 (private) depending on the type of institution in which a student is enrolled. New Mexico’s 529 investing has some distinct advantages over other states: Tax deduction is unlimited. The state is one of only four in the country to provide an unlimited state deduction for contributors to its 529 plans. This is especially beneficial for taxpayers who contribute more than the state’s standard tax deduction of $6,350 per year for a single person. Tax deduction is an "above the line" income adjustment. This means residents can consider their contribution when deciding on the option to itemize or take the standard deduction. The taxpayer's contributions to the 529 plan will decrease taxable income regardless of whether the taxpayer decides to take the standard or itemized deduction. Benefits of a 529 Plan The New Mexico Higher Education Department (HED) has outlined some of the other benefits of 529 plans, including: Savings advantages such as tax-deferred accumulationFederal and state tax-free earnings for qualified withdrawalsSpecial "gift" tax treatment Additionally, 529 plans offer personal control and flexibility over assets and beneficiaries. These funds can also be used for K-12 education costs. New Mexico's HED points out that very few students receive full scholarships to college. As a result, families must devise a multi-pronged approach to pay for a child's higher education. This often includes student loans and financial aid as well as savings plans. Because money invested in a 529 college savings plan has the ability to grow tax-free, these funds can provide a substantial savings benefit over many years. Value New Mexico residents trying to decide whether to use one of the state's college savings plans or another state's 529 plan need to account for the potential tax savings of contributing to their in-state plan. Note New Mexico does not currently offer a tax deduction to residents contributing to out-of-state plans. Considering that the top New Mexico income tax rate is 4.9%, each $1,000 contribution can potentially save a taxpayer up to $49 at tax time. Currently, New Mexico does not offer a tax deduction for contributing to any other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account. Consult with a tax advisor if you have questions about the most appropriate college savings plan for your family based on your income, tax status, and the number of students you intend to support. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Education Data Initiative. "Student Loan Debt Statistics." U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." College Tuition Compare. "New Mexico State 2021 Average Tuition Costs." Taxation & Revenue New Mexico. "Frequently Asked Questions."