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Supreme Court upholds Kentucky tax discrimination
(May 19, 2008) - In a 7-2 decision, the U.S. Supreme Court has upheld Kentucky's right to provide a state tax exemption for interest received from in-state municipal bonds while at the same time imposing Kentucky tax on its taxpayers investing in out-of-state municipal bonds. (Davis v. Kentucky)
The case was being closely followed by the 529 industry. If the decision had gone against Kentucky, a similar challenge would presumably be made against many of the states offering a state income tax deduction for contributions to the in-state 529 plan.
By deciding in favor of Kentucky, the ability of states to restrict their 529 tax benefits to the in-state 529 plan is more secure.