FOR PROFESSIONALS

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?

Access exclusive tools and resources for professionals only

Access our exclusive content, reports, calculators and sales leads with a Premium Subscription.

Free for Ameriprise Financial, Commonwealth Financial, Morgan Stanley, Raymond James and RW Baird.

Ameriprise Financial instructions

Consult with your office/branch manager for instructions.

Commonwealth Financial instructions

Commonwealth Financial Advisors, you will find your Savingsforcollege.com portal on CommunityLink in the Financial Planning Playbook under Education Planning Tools.

LPL Financial instructions

Visit the Education Planning page in the LPL BranchNet Resource Center to access your Savingforcollege.com portal.

Morgan Stanley instructions

Visit Tools and Forms in the Education Savings Products page in 3DResources to access your Savingforcollege.com portal.

Raymond James instructions

Visit the 529 Plan Resource Center on RJ Net to access your Savingforcollege.com portal.

RW Baird instructions

Visit the 529 Department page on BairdWeb to access your Savingforcollege.com portal.

 

Reset email successfully sent.
Please check your inbox.

Close