Answers to Questions about State Income Tax Breaks for 529 Plans

During our webinar about How to Reach Your College Savings Goals with a 529 Plan, participants asked dozens of questions. Here are the answers to questions about state income tax breaks for 529 plans.

I live in a state that offers no tax deduction on 529 plans, if I use a plan from a different state, do their tax deductions transfer to my state/federal taxes?

No. State income tax breaks based on contributions to the state’s 529 plan are provided by the state in which you reside, not the state that offers the 529 college savings plan. If your state does not offer a state income tax deduction or tax credit (7 states) or does not have a state income tax (8 states), you cannot benefit from the state income tax breaks offered by other states.

However, taxpayers in every state have the same federal income tax benefits, such as earnings accumulate on a tax-deferred basis and can be withdrawn tax-free as long as they are spent on qualified higher education expenses.

Do you get a tax break on prepaid tuition plans?

All states that offer prepaid tuition plans and have a state income tax deduction for contributions to the state’s 529 college savings plan also offer the state income tax deduction for contributions to the state’s prepaid tuition plan.

Are there tax implications on whether the plan is owned by the parents or grandparents? Is one preferable to the other?

Ten states require the taxpayer to be the account owner in order to claim the state income tax deduction or tax credit. These states are Iowa, Massachusetts, Missouri, Montana, Nebraska, New York, Rhode Island, Utah, Virginia and Washington DC. This limitation causes some grandparents to open the 529 plan account with themselves as the account owner instead of contributing to a parent-owned 529 plan because the grandparents want to claim the state income tax break on their contributions. 

To take advantage of state tax breaks, is it advisable to open a 529 account with the parent as the beneficiary on top of a 529 account with the child as the beneficiary?

You could do this, but only in states that limit the state income tax break on a per-beneficiary basis.

Only a dozen states provide the state income tax deduction or tax credit on a per-beneficiary basis. 

These states are Georgia, Iowa, Kansas, Louisiana, Maryland, Ohio, Oklahoma, Pennsylvania, Utah, Vermont, Virginia and Wisconsin. 

Most families do not reach the per-beneficiary contribution limits, which range from $4,000 to $30,000 per beneficiary per year. The remaining states provide the state income tax deduction or tax credit on a per-taxpayer basis or are unlimited.

See also: How Much Is Your State’s 529 Plan Tax Deduction Really Worth