How Much is your State’s 529 Tax Deduction Really Worth?

Many states offer state income tax deductions or credits for contributions to a 529 plan. Your 529 state tax deduction amount will depend on where you live and how much you contribute to a 529 college savings plan during a given tax year.

529 Plan Tax Benefits 

529 plans allow account owners, friends, and family to contribute to higher education savings with after-tax income and enjoy two types of potential tax benefits: 

• Federal tax benefits: 529 plan contributions grow federally tax-free, and earnings are not subject to federal income tax when you take withdrawals for qualified education expenses, including up to $10,000 in K-12 tuition expenses and student loan payments. Note that there is no federal income tax deduction on 529 plan contributions. 
• State tax benefits: Most states with an income tax allow either a deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes. Most states allow any contributor, not just the account owner, to claim the applicable tax benefits on their tax return. However, not all states follow the federal tax treatment of K-12 tuition or student loan expenses.

States that offer an income tax benefit for 529 plan contributions

Over 30 states, including the District of Columbia, offer a state income tax deduction or tax credit for 529 plan contributions. In most cases, taxpayers must contribute to their home state’s plan to qualify for a state income tax benefit. 

However, nine tax parity states offer a state income tax benefit for contributions to any 529 plan and not only in-state plans:

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

In most states, the total amount or a portion of a taxpayer’s 529 plan contribution is deductible in computing state income tax. But Indiana, Oregon, Utah, and Vermont offer a state income tax credit for 529 plan contributions. Depending on their adjusted gross income, Minnesota taxpayers are eligible for a state income tax deduction or credit. Four states currently have a state income tax but do not offer a contribution deduction: California, Hawaii, Kentucky, and North Carolina.

Potential annual tax savings by state 

How 529 plan state income tax benefits work

State income tax benefits are based on the amount of a taxpayer’s total 529 plan contributions in a given tax year. While no annual contribution limits exist for 529 plans, most states limit the total contributions that qualify for an income tax credit or deduction. 

For example, New York residents are eligible for an annual state income tax deduction for 529 plan contributions up to $5,000 ($10,000 if married filing jointly). In New Mexico, South Carolina, and West Virginia, 529 plan contributions are fully deductible in computing state income tax.

Most taxpayers are not required to hold funds in a 529 plan for a specified amount of time before claiming a state income tax benefit. 

Taxpayers can contribute to a 529 plan, immediately take a qualified distribution to pay for college or K-12 tuition, and qualify for the state income tax benefit. However, Montana and Wisconsin block this state tax deduction loophole by imposing time limits, and Michigan and Minnesota base state income tax benefits on annual contributions net of distributions.

Parents saving for K-12 tuition and adults using a 529 plan to pay for graduate school may get the equivalent of an annual discount on tuition by funneling payments through a 529 plan and claiming a state income tax benefit each year.

Most states require 529 plan contributions be made by December 31 to qualify for a state income tax benefit. Still, taxpayers in six states have until April to make 529 plan contributions that qualify for a prior year income tax deduction.

Who is eligible for a 529 plan state income tax benefit?

States typically offer state income tax benefits to taxpayers who contribute to a 529 plan, including grandparents or other loved ones who give the gift of college. However, only the 529 plan account owner (or the account owner’s spouse) may claim a state income tax benefit in seven states.

Eligible taxpayers may continue to claim a 529 plan state income tax benefit each year they contribute to a 529 plan, regardless of the beneficiary’s age. No time limits are imposed on 529 plan accounts, so families may continue to contribute throughout the child’s elementary school, middle school, high school, college years, and beyond.

State income tax benefits should not be the only consideration when choosing a 529 plan. Attributes such as fees and performance must always be considered before you enroll in a 529 plan. In some cases, the better investment performance of another state’s 529 plan (where earnings are compounded) can outweigh the benefits of a state income tax deduction.

FAQs

1. Do 529 contributions reduce state taxable income?

Yes, 529 contributions may reduce your state taxable income to varying degrees in each state. For example, Colorado allows you to deduct $20,700 per taxpayer per beneficiary, while Connecticut allows you to deduct a maximum of $5,000 ($10,000 if filing jointly) in a single year.

2. Do you get a tax deduction for contributing to a 529 plan?

There isn’t a 529 federal tax deduction, but there may be for state income tax. 529 contributions are tax-deductible for most states, allowing you to lessen your tax burden at the end of each fiscal year.

3. Which states allow tax deductions for 529 contributions?

Here are the states that allow tax deductions for 529 contributions. Keep in mind that some of them vary in the amount you’re able to deduct and general 529 tax benefits. For more detailed information, check out our article with information about comparing 529 plans and deductions 529 tax deductions by state.

4. Can you deduct out-of-state 529 contributions?

If you file state income taxes in one of the nine tax parity states, which are Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania, you may be able to claim a state tax deduction on 529 plan contributions you make to an out-of-state plan.

5. Are 529 contributions pre-tax or post-tax?

529 contributions are post-tax.

6. Are 529 contributions tax-deductible for grandparents?

Yes, some 529 contributions may be tax-deductible for grandparents. However, some states only permit the account holder to deduct contributions.