Income tax center

What about state taxes?

[Excerpts from Chapter 3 of The Best Way to Save for College – A Complete Guide to 529 Plans (2015-16 Edition)]

State tax laws are not uniform, but here, generally speaking, is the way it should work for most:

• Opening a 529 account in a state other than your own does not subject you or your beneficiary to that state's income tax.
• If a distribution qualifies for exclusion from federal taxable income, then it should also qualify for exclusion from your own state's taxable income. Currently, only one state—Alabama—will tax a qualified distribution, and only when that distribution comes from a non-Alabama 529 plan. Qualified distributions from an Alabama 529 plan remain exempt from that state’s income tax. (The Alabama legislature has considered - but not yet passed - changes to its laws to remove this particular distinction.)
• If a distribution is federally taxable, then it will probably also be taxable on your state income tax return. You may also have to "recapture" any state tax deductions or credits claimed in previous years. Be careful here: some states will treat a federally tax-free rollover as a taxable distribution; and some states will exclude the income on a nonqualified distribution if the distribution is attributable to the beneficiary's death, disability, or receipt of a scholarship.
• Most states will follow federal rules regarding the amount and timing of reportable income, and in determining who reports it (account owner or beneficiary).

Next: What are adjusted qualified higher education expenses?