Massachusetts Governor Charlie Baker recently signed House Bill 4569, 'An Act relative to job creation and workforce development' into law on August 10, 2016. The primary role of the bill was to promote economic development for the state. However, it also included a new tax benefit for families saving for college. Residents will be able to deduct up to $1,000 in contributions to a Massachusetts Educational Financing Authority (MEFA) U.Fund from their state income tax (up to $2,000 for married couples filing jointly) beginning January 1, 2017 through the 2021 tax year, when the deduction is scheduled to expire. This announcement comes as a welcome surprise to families, as other states have found it challenging to sustain or initialize a 529 tax benefit. Ideally, we would like to see other states follow in Massachusetts's footsteps, but historically this hasn't been the case.
Common roadblocks to state tax incentives
Almost every state struggles to balance their budget each year, and tax deductions both lower revenue and make it less predictable. Even when a proposed deduction makes it into a bill there is no guarantee it will be enacted, since it's usually packaged alongside various unrelated legislation. We've seen numerous examples of these types of challenges in recent years, including:
- The state tax deduction available to North Carolina taxpayers for contributions to the National College Savings Program was eliminated in 2014.
- At the end of 2015, the tax deduction for Maine residents expired. Maine residents still have the Maine Matching Grant Program, however.
- In June 2016, Minnesota lawmakers approved a bill that included a provision allowing residents a state tax deduction of up to $1,500 a year ($3,000 for couples filing jointly) for 529 plan contributions. It would have also offered a $500 tax credit option for those in the lowest income brackets to encourage saving. Governor Mark Dayton vetoed the bill at the last minute for reasons unrelated to the 529 provision.
Top 5 benefits to states offering a 529 state tax benefit
Despite these challenges, for the state the benefits of offering a 529 tax deduction or credit outweigh the short-term revenue loss. Regardless of whether the incentive applies to the in- or out-of-state plan, having college-educated residents is a win-win for both the states and 529 plan account owners.
- The greater the average education level of a population, the greater the overall economic prosperity of that population. This is basic macroeconomics.
- Every dollar saved is a dollar that doesn't have to be borrowed. Government and citizen both rely too heavily on debt, which is a burden that holds back graduates from starting families, buying homes, and investing in their communities.
- In turn, it reduces future debt burdens to the state. Student debt is fast becoming one of the leading causes of bankruptcy in the United States, challenging even medical costs. Encouraging savings has a direct impact on future personal bankruptcy rates for state residents.
- 529 plans are, usually, managed by third-party contractors like Ascensus, Fidelity, Oppenheimer, T. Rowe Price, and TIAA. State tax deductions are appealing to both current and prospective 529 program managers, increasing competition when the state plan comes up for rebid. This in turn leads to things like lower costs, better investment options and increased advertising spending.
- States that offer an in-state benefit have higher participation from their residents than those without an in-state benefit.
Massachusetts residents should be thrilled for themselves and their families to be able to take advantage of this new state tax benefit. To learn more about the Massachusetts U.Fund plan, visit for information.
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.
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100 Years of Bankruptcy: Why More Americans Than Ever Are Filing -- Federal Reserve Bank of St. Louis
Accounting for the Rise in Consumer Bankruptcies 03/25/2009- Igor Livshits, James MacGee, Michèle Tertilt, Northwestern.edu