Income tax center

What about state taxes?

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.
• Many states conform with the federal definition of qualified education expenses. In these states, if a distribution qualifies for exclusion from federal taxable income, then it should also qualify for exclusion from state taxable income. Some states do not include K-12 expenses, student loan payments or Roth IRA rollovers in their definition of qualified expenses. In these states, if you make a withdrawal for an unqualified purpose, you will need to add the distribution to your taxable income when preparing state income taxes.
• 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 education expenses?