It’s a good idea when paying major expenses with a home equity line of credit (HELOC) to pause and consider if there are any “extra” steps that can be taken to save money. For instance, if you’ve decided to finance a car or make a major improvement to your home with your HELOC, try to first pay the contractor or supplier with a rewards credit card, and then pay the credit card bill (before interest accrues) with the HELOC check.
On a $20,000 home improvement, taking this extra step with a 2% rewards card will pocket you an easy $400.00. Of course, it’s critical you pay off your credit card balance each month if you use this strategy.
The Wall Street Journal points out a similar strategy you can follow when paying college costs (1). Rather than paying the college directly with funds drawn on your HELOC, consider first temporarily depositing the funds into your state’s 529 college savings plan. Taking this extra step before paying the college can net you a nice break on your state income taxes.
Not all states have an income tax and not all of the ones that do offer 529 plan tax deductions or credits. But 26 states (plus Washington D.C.) do. The value of the tax break varies widely and depends on the amount you deposit into the account. This table at Finaid.org summarizes current state tax breaks for 529 plans.
In general, states only give tax breaks for deposits into their own 529 plans. If you don’t already have an account, you’ll need to set one up. Here are links to all the state plans.
(1) Paying for college is one of the most popular uses of home equity financing. According to a Lending Tree survey:
“The most popular uses for home equity loans were home improvement at 38.1%, debt consolidation at 31.9%, home purchase at 4.6%, auto purchase at 4.3%, college tuition at 2.9%, and small business expenses at 2.2%.”
Technorati Tags: home equity line of credit, HELOC, rewards credit card, college costs, 529 college savings plan, 529 plan tax deductions, popular uses of home equity financing
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