Tax benefits of California 529 plans

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

Tax benefits of California 529 plans

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

California 529 plans offer the standard federal and state tax benefits, but do not offer any special state income tax benefits for contributions to California’s ScholarShare 529 plan.

Like most 529 plans, California’s ScholarShare 529 plan has state tax benefits that mirror the federal tax benefits:

  • Contributions are eligible for the annual gift tax exclusion of $15,000 ($30,000 for a couple giving jointly)
  • Contributions beyond the annual gift tax exclusion are eligible for 5-year gift tax averaging, permitting lump sum contributions of up to $75,000 ($150,000 for a couple giving jointly) without incurring gift taxes
  • Earnings accumulate on a tax-deferred basis
  • Qualified distributions for qualified higher education expenses are entirely tax-free
  • The earnings portion of a non-qualified distribution is taxed at the beneficiary’s rate and is subject to a 10% federal tax penalty

However, California adds a 2.5% state tax penalty if a non-qualified distribution is subject to a federal tax penalty. Distributions for K-12 tuition are not considered to be qualified and are subject to state income tax on the earnings portion of the distribution.

Contributions to the California 529 plan are not tax-deductible on state income tax returns. California is one of eight states that have a state income tax but which do not offer a tax deduction or tax credit based on contributions to the state’s 529 plan. (Seven states have no state income tax.)

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Find a 529 Plan. Select your state below.

Did you know that residents are not limited to investing in their own state’s plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state’s plan and other options.

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