My Child Turned 18. Can I Still Claim a 529 State Tax Benefit?

Families who contribute to a 529 plan may be eligible for a state income tax deduction or credit, depending on where they live. A state income tax benefit may be claimed each year contributions are made, including before, during and after the beneficiary attends college. Generally, there is no age limit on when a state income tax deduction or tax credit may be claimed.

529 plan age limits

With a Coverdell Education Savings Account (ESA), parents must stop making contributions once the beneficiary turns age 18. When the beneficiary turns age 30, any leftover funds in the account must be withdrawn within 30 days to avoid income tax and a 10% penalty.

However, unlike Coverdell ESAs, 529 plans do not have age limits. When a 529 plan beneficiary graduates or leaves college, the funds can remain in the account indefinitely.

Investments in the 529 plan will continue to grow tax-deferred and distributions will be tax-free as long as they are used to pay for qualified expenses, which include college costs and up to $10,000 per year in K-12 tuition. Taxpayers in over 30 states may also claim a state income tax deduction or credit for 529 plan contributions.

Federal and state income tax benefits are available regardless of the 529 plan beneficiary’s age.

Limits on 529 plan state income tax benefits

Most states have annual limits on the amount of 529 plan contributions that qualify for an income tax deduction or credit. These limits are typically around $10,000 per year, but some states have higher limits and some states have lower limits.

·      Illinois taxpayers may deduct up to $10,000 ($20,000 if married filing jointly) in 529 plan contributions from state taxable income each year.

·      Indiana taxpayers may claim a 20% income tax credit on up to $5,000 in 529 plan contributions, for a maximum $1,000 annual credit.

·      Pennsylvania offers a state income tax deduction for 529 plan contributions up to the amount of the annual gift tax exclusion amount ($15,000 in 2019).

·      In Colorado, New Mexico, South Carolina and West Virginia contributions to a 529 plan are fully deductible in computing state income taxes.

State income tax benefits may be subject to recapture in the event of a non-qualified distribution, a rollover to another state’s 529 plan or when distributions are used to pay for K-12 tuition. Rules vary by state. 

None of these limits, however, depend on the beneficiary’s age.

Should you keep funding a 529 plan after the child reaches age 18?

Parents should continue to make 529 plan contributions until they are finished paying for the child’s college education. There won’t be much time left to take advantage of federal tax benefits, but parents may still be able to claim a state tax income tax benefit. By funneling the remaining college tuition through a 529 plan and claiming a state income tax deduction or tax credit each year, parents essentially get the equivalent of an annual discount on college costs at their marginal tax rate.

There’s no need to stop making contributions once the beneficiary graduates from college. 529 plan funds can be used to pay for graduate school or continuing education at an eligible institution. Parents who claim a state income tax benefit can invest the tax savings into the 529 plan for an extra savings boost.

529 plan tax benefits for grandparents

Grandparents can also take advantage of 529 plan tax benefits, regardless of the grandchild’s age.

Grandparents who want to give a gift of college savings often wonder whether they should open their own 529 plan or contribute to a parent-owned account. While there are some advantages for grandparents to own their own 529 plan account, having a parent-owned 529 plan will minimize the impact on the student’s eligibility for need-based financial aid.

Grandparents may still qualify for state income tax benefits regardless of who owns the 529 plan account. Most states allow anyone who contributes to a 529 plan, including a grandparent, to claim a state income tax deduction or tax credit. Only 10 states require the taxpayer to be the account owner.

In addition to state income tax benefits, some grandparents may also use 529 plans as an estate planning tool. In 2019, contributions up to $15,000 qualify for the annual gift tax exclusion and do not count against the $11.58 million lifetime exemption.

Grandparents can use 5-year gift-tax averaging to make lump sum contributions between $15,000 and $75,000 that can be spread evenly over 5 years. The gift tax exclusion amount is per gift giver, per beneficiary. For example, grandmother and grandfather with three grandchildren can contribute $450,000 to the grandchildren’s 529 plans ($150,000 each) in 2019 without having to pay gift taxes.