If you have invested in a 529 plan that emphasizes stocks, chances are that your account value is down. Thus, you may be able to reduce your 2002 income tax liability by closing any 529 accounts that have lost value. IRS Publication 970 confirms that a tax loss on liquidation of a 529 account is a miscellaneous itemized deduction.
Such deductions are lumped with items such as tax preparation and investment expenses; they’re deductible only to the extent they exceed 2 percent of your adjusted gross income (AGI). If your AGI in 2002 is $60,000, for example, miscellaneous deductions over $1,200 are deductible.
Suppose, with AGI of $60,000 this year, you have spent $1,200 on other miscellaneous itemized deductions. You have invested $20,000 in your state’s 529 plan but your account is now worth only $15,000.
Closing the account would give you a $5,000 loss, which would be fully deductible because you’re over the 2 percent threshold. You won’t be limited by the $3,000 maximum on deductions for capital losses. Then you can take your remaining $15,000 and invest in some other 529 plan.
