How Does Your State’s 529 Plan Income Tax Benefit Work?

Kathryn FlynnBy:  Kathryn FlynnBy: Savingforcollege.com

How Does Your State’s 529 Plan Income Tax Benefit Work?

Kathryn FlynnBy:  Kathryn FlynnBy: Savingforcollege.com

Taxpayers in over 30 states may claim a state income tax deduction or tax credit for contributions to a 529 plan. However, each state has its own rules regarding the type of tax benefit and the amount of 529 plan contributions that are eligible for a state tax deduction or credit each year.

Understanding how 529 plan state income tax benefits work can help parents make an informed decision when selecting a 529 plan for their child.

529 plan state income tax benefits

Many states offer incentives to encourage residents to save for college. Studies show that children who have even a small amount saved for college are more likely to attend and graduate. Having a highly educated workforce can help drive economic growth and development in the state.

More than two-thirds of the states offer an income tax benefit for college savings. The majority of states require taxpayers to contribute to their home state’s 529 plan to qualify for an income tax benefit, but seven states offer a tax incentive for contributions to any 529 plan:

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

The most common benefit offered is a state income tax deduction for 529 plan contributions. However, Indiana, Utah and Vermont offer a state income tax credit for 529 plan contributions and Minnesota offers a state income tax deduction or tax credit, depending on the taxpayer’s adjusted gross income.

Limits on annual 529 state income tax benefits

Most states limit the amount of annual 529 plan contributions eligible for a state income tax benefit, but annual 529 plan contributions are fully deductible in:

  • Colorado
  • New Mexico
  • South Carolina
  • West Virginia

In some states, the amount of 529 plan contributions eligible for an income tax benefit is per beneficiary, but in other states the amount is per taxpayer. If the state income tax benefit is offered per beneficiary, parents with multiple children should consider opening a 529 plan for each child to maximize the potential state tax savings.

For example:

  • Nebraska offers married taxpayers a state tax deduction for 529 plan contributions to a 529 plan of up to $10,000 per year
  • Ohio offers married taxpayers a state tax deduction for 529 plan contributions of up to $4,000 per year for each beneficiary

Married grandparents in Nebraska who want to contribute $15,000 toward college savings for five grandchildren would only be able to deduct $10,000 from state taxable income. But, if the grandparents lived in Ohio, they may contribute $3,000 to each of the five grandchildren and deduct the full $15,000 from state taxable income.


Carryforward of excess 529 plan contributions

Ohio is also one of 12 states that allow taxpayers to carryforward excess 529 plan contributions to deduct in future tax years. That means if the grandparents want to contribute more than Ohio’s annual limit of $4,000 per beneficiary, they may deduct the excess in future years in increments of $4,000 per year, until the entire contribution amount is deducted.

529 plan rollovers

Parents may consider rolling funds from an out-of-state 529 plan to their home state’s 529 plan and claiming a state income tax deduction or credit. Families may also consider switching 529 plans if they move to another state. However, some states do not allow taxpayers to claim a state income tax benefit for rollover contributions, and some states only allow the principal or a limited portion of a 529 plan rollover contribution to qualify for a state income tax benefit.

529 plan contributions for K-12 tuition

The Tax Cuts and Jobs Act of 2017 expanded the definition of 529 plan qualified expenses to include up to $10,000 in K-12 tuition per year, per beneficiary. However, some states have not conformed with the federal law and consider K-12 tuition a non-qualified 529 plan expense. Families in non-conforming states who use 529 plan funds to pay for K-12 tuition may be subject to state income tax on the earnings portion of the non-qualified distribution, and state income tax benefits may be subject to recapture.

529 Plan State Income Tax Benefits

State

Income Tax Benefit

Limit (Married Filing Jointly)

Limit Per

Carryforward of Excess Contributions

Are Inbound Rollovers Eligible for State Income Tax Benefit?

Alabama

Tax Deduction

$10,000

Taxpayer

No

Yes

Arizona

Tax Deduction

$4,000

Taxpayer

No

No

Arkansas

Tax Deduction

$10,000

Taxpayer

No

$7,500/$15,000

Colorado

Tax Deduction

Full amount of contribution

Beneficiary

No

No

Connecticut

Tax Deduction

$10,000

Taxpayer

5 years

No

District of Columbia

Tax Deduction

$8,000

Taxpayer

5 years

No

Georgia

Tax Deduction

$4,000

Beneficiary

No

No

Idaho

Tax Deduction

$12,000

Beneficiary

No

No

Illinois

Tax Deduction

$20,000

Taxpayer

No

Principal portion only

Indiana

Tax Credit

$5,000

Taxpayer

No

No

Iowa

Tax Deduction

$6,774

Beneficiary

No

Yes

Kansas

Tax Deduction

$6,000

Beneficiary

No

No

Louisiana

Tax Deduction

$4,800

Beneficiary

Unlimited

No

Maryland

Tax Deduction

$5,000

Beneficiary

10 years

Yes

Massachusetts

Tax Deduction

$2,000

Taxpayer

No

No

Michigan

Tax Deduction

$10,000

Taxpayer

No

No

Minnesota

Tax Deduction or Tax Credit

$3,000

Taxpayer

No

No

Mississippi

Tax Deduction

$20,000

Taxpayer

No

Yes

Missouri

Tax Deduction

$16,000

Taxpayer

No

No

Montana

Tax Deduction

$6,000

Taxpayer

No

Yes

Nebraska

Tax Deduction

$10,000

Taxpayer

No

Yes

New Mexico

Tax Deduction

Full amount of contribution

Beneficiary

No

Principal portion only

New York

Tax Deduction

$10,000

Taxpayer

No

Yes

North Dakota

Tax Deduction

$10,000

Taxpayer

No

No

Ohio

Tax Deduction

$4,000

Beneficiary

Unlimited

Yes

Oklahoma

Tax Deduction

$20,000

Beneficiary

5 years

Yes

Oregon

Tax Deduction

$4,865

Taxpayer

4 years

Yes

Pennsylvania

Tax Deduction

$30,000

Beneficiary

No

No

Rhode Island

Tax Deduction

$1,000

Taxpayer

Unlimited

No

South Carolina

Tax Deduction

Full amount of contribution

Beneficiary

No

Yes

Utah

Tax Credit

$4,000

Beneficiary

No

Yes

Vermont

Tax Credit

$5,000

Beneficiary

No

Principal portion only

Virginia

Tax Deduction

$4,000

Beneficiary

Unlimited

Yes

West Virginia

Tax Deduction

Full amount of contribution

Beneficiary

5 years

No

Wisconsin

Tax Deduction

$3,280

Beneficiary

Unlimited

Principal portion only


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