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Whether it’s for a new job or another personal reason, relocating your family to a new state can be overwhelming. On top of packing, moving and getting acclimated in your new state, you might have to file two state income tax returns. Taxpayers who move to another state during the tax year typically have to file a part-year tax return in each state.
As you establish residency in your new state, it’s important to review your old and new state’s rules regarding state income tax benefits for 529 plan contributions. In some cases, you may be able to claim a state income tax benefit in both your old and new state during the year of the move. Each state’s tax benefit would be based on the 529 plan contributions you made while living in that state.
The rules regarding state income tax deductions and credits for 529 plan contributions vary by state. To maximize state income tax benefits, families who are relocating to a new state may consider:
- Opening and contributing to a new 529 plan in the new state after the move
- Continuing to contribute to their existing 529 plan after the move
- Rolling over existing 529 plan funds from the old 529 plan into a new 529 plan in the new state after the move
Do you have to contribute to your new state’s 529 plan?
Over 30 states offer a state income tax deduction or state income tax credit for contributions to a 529 plan. In most states, residents must contribute to an in-state 529 plan to qualify for a state income tax benefit.
For example, Iowa residents are eligible to deduct 529 plan contributions up to $3,387 ($6,774 if married) from Iowa taxable income in 2019. But, only contributions to an Iowa 529 plan are eligible. If the family moves to Illinois during 2019, they are not able to deduct contributions to an Iowa 529 plan from their Illinois taxable income after the move.
To maximize state income tax benefits during the year that they move the family might:
- Contribute $3,387($6,774) to the Iowa 529 plan before they move to Illinois, since that is the maximum amount that can be deducted from Iowa state income tax in 2019
- Open an Illinois 529 plan and make contributions once they become Illinois residents. Contributions up to $10,000 ($20,000 if married) to an Illinois 529 plan are deductible from Illinois state income tax.
The amount of 529 plan contributions you can deduct from your new state’s taxable income depends on the state. 529 plan contributions are fully deductible in Colorado, New Mexico, South Carolina and West Virginia.
Your new state may offer a state tax benefit per taxpayer or per beneficiary. If the state offers a tax deduction or tax credit for contributions per beneficiary, parents with multiple children should consider opening a separate 529 plan for each child to maximize the tax benefits.
Tax parity states
Seven states offer a state income tax deduction or credit for 529 plan contributions to any 529 plan. With the exception of Arkansas, these states offer the same tax benefit for contributions to an in-state 529 plan or an out-of-state 529 plan.
If a family moves to one of these tax parity states, they may be eligible for a state income tax benefit for contributions to their existing 529 plan after they move. There may not be a need to switch 529 plans or do a rollover. Tax parity states include:
- Arizona
- Arkansas
- Kansas
- Minnesota
- Missouri
- Montana
- Pennsylvania
Rollover contributions
In 18 states families may claim a state income tax benefit for inbound 529 plan rollover contributions. The IRS allows one tax-free rollover in a 12-month period. A family moving to one of these states may consider rolling over their existing 529 plan balance to an in-state 529 plan in the new state. Most of these states offer the same income tax benefits for new and rollover contributions, but Illinois, New Mexico, Vermont and Wisconsin limit the tax deduction to the principal portion of the rollover. Arkansas has a lower tax deduction limit for rollover contributions than for new contributions.
However, in some states, taxpayers are required to pay back any 529 plan state income tax benefits claimed if the funds are rolled over to another state’s 529 plan. It’s important to check your state’s recapture provisions before initializing a 529 plan rollover.
