One of the big perks of using a 529 plan to save for college is that many states offer a tax deduction for contributions to the plan. But, like anything, there are rules that apply.

Some states require you to contribute to their state’s plan, while other states allow you to take the tax deduction for contributions to any state’s plan. Finally, there are (sadly) states that don’t offer any incentives for contributions.

Also, the rules for withdraw can also impact your taxes. Make sure you understand the differences in qualified 529 plan withdrawals so you aren’t paying taxes and penalties!

What Is a 529 Plan?

A 529 plan allows you to contribute money for educational use. The funds must be used for education, which includes college or K–12 tuition.

The owner/donor of the account remains in control of the account. This is different from a UGMA or UTMA account, which allows the beneficiary to take control of the account once they reach legal age.

What Is the 529 Plan Contribution Tax Deduction?

529 plans do offer state tax deductions on contributions. But not every state offers the deduction. 529 plans do not offer federal contribution tax deductions.

Are There Any Fees?

Yes. Fees can vary greatly depending on the state and investment plan.

How Do I Open an Account?

You can open a 529 plan with your brokerage or by searching for 529 plans. Once you find one you like, you’ll choose an in-state or out-of-state plan. After the account is opened, you can then choose one of the investment options offered by the plan.

Check out this list here and see where to open the 529 plan that makes the most sense for you:

Is My Money Safe?

If by safe you mean FDIC-insured, that will depend on the investments in the 529 plan. Some states do offer FDIC-insured plans. Check with the plan administrator to be sure.

However, remember that most 529 plans are investments – they could lose money over time.

Tax Benefits by State

For most states, you must contribute to your state’s 529 plan (as opposed to an out-of-state plan) to receive any state tax benefit. However, seven states offer tax parity, which allows you to contribute to any 529 state plans. These seven states are:

  • Arizona
  • Arkansas
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Pennsylvania

If your state has no income tax, the 529 plan tax deduction doesn’t apply. These states include:

  • Florida
  • Nevada
  • Texas
  • South Dakota
  • Washington
  • Wyoming

Some states do have income taxes but no 529 plan tax deduction. They include:

  • California
  • Delaware
  • Hawaii
  • Kentucky
  • Massachusetts
  • Minnesota
  • New Hampshire
  • New Jersey
  • North Carolina
  • Tennessee

According to finaid.org, the following states offer deductions:

  • Alabama: $5,000 per parent ($10,000 joint)
  • Arizona: $2,000 single or head of household, or $4,000 joint (any state plan)
  • Arkansas: $5,000 per parent ($10,000 joint)
  • Colorado: Full amount of contribution
  • Connecticut: $5,000 per parent ($10,000 joint), 5-year carryforward on excess contributions
  • Georgia: $2,000 per beneficiary
  • Idaho: $4,000 single/$8,000 joint
  • Illinois: $10,000 single/$20,000 joint per beneficiary
  • Indiana: 20% tax credit on contributions up to $5,000 ($1,000 maximum credit)
  • Iowa: $3,163 single/$6,326 joint per account
  • Kansas: $3,000 single/$6,000 joint per beneficiary (any state plan), above-the-line exclusion from income
  • Louisiana: $2,400 single/$4,800 joint per beneficiary, above-the-line exclusion from income, unlimited carryforward of unused deduction into subsequent years
  • Maine: $250 per beneficiary
  • Maryland: $2,500 per account per beneficiary, 10-year carryforward
  • Michigan: $5,000 single/$10,000 joint, above-the-line exclusion from income
  • Mississippi: $10,000 single/$20,000 joint, above-the-line exclusion from income
  • Missouri: $8,000 single/$16,000 joint, above-the-line exclusion from income
  • Montana: $3,000 single/$6,000 joint, above-the-line exclusion from income
  • Nebraska: $10,000 per tax return ($5,000 if filing separate), above-the-line exclusion from income
  • New Mexico: Full amount of contribution, above-the-line exclusion from income
  • New York: $5,000 single/$10,000 joint, above-the-line exclusion from income
  • North Dakota: $5,000 single/$10,000 joint
  • Ohio: $2,000 per beneficiary per contributor or married couple, above-the-line exclusion from income, unlimited carryforward of excess contributions
  • Oklahoma: $10,000 single/$20,000 joint per beneficiary, above-the-line exclusion from income, five-year carryforward of excess contributions
  • Oregon: $2,265 single/$4,530 joint (i.e., $2,265 per contributor) per year, above-the-line exclusion from income, four-year carryforward of excess contributions
  • Pennsylvania: $14,000 per contributor/$28,000 joint per beneficiary (any state plan)
  • Rhode Island: $500 single/$1,000 joint, above-the-line exclusion from income, unlimited carryforward of excess contributions
  • South Carolina: Full amount of contribution, above-the-line exclusion from income
  • Utah: 5% tax credit on contributions of up to $1,900 single/$3,800 joint per beneficiary (credit of $95 single/$190 joint)
  • Vermont: 10% tax credit on up to $2,500 in contributions per beneficiary (up to $250 tax credit per taxpayer per beneficiary)
  • Virginia: $4,000 per account per year (no limit for age 70 and older), above-the-line exclusion from income, unlimited carryforward of excess contributions
  • Washington, D.C.: $4,000 single/$8,000 joint, above-the-line exclusion from income
  • West Virginia: Full amount of contribution up to extent of income, above-the-line exclusion from income, five-year carryforward of excess contributions
  • Wisconsin: $3,000 per dependent beneficiary, self or grandchild, above-the-line exclusion from income

Is It Worth It?

If you want control over the money you’re putting toward a beneficiary’s college tuition, then yes — it is worth it. Be sure the funds will eventually be used for education. If not, you’ll incur a 10% penalty, plus you’ll be taxed at your ordinary income tax rate for non-educational use of the funds.

The post Does Your State Offer a 529 Plan Contribution Tax Deduction? appeared first on The College Investor.



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