Contributing to a 529 college savings account can offer tax advantages, including tax-deferred growth and tax-free withdrawals for qualified education expenses. But you may be wondering if you can also get a 529 tax deduction or credit. While no federal tax break exists for deducting 529 plan contributions, you may be able to claim an incentive at the state level. Here’s more on how a 529 plan deduction works and when you may be able to claim one on your taxes.
There are actually several tax efficient ways to save for college, and a financial advisor can help you find one that’s appropriate for you.
Overview of 529 Plans
A 529 college savings account is a tax-advantaged way to set aside money for education expenses. All 50 states offer at least one 529 savings plan, though some may offer multiple options. You don’t have to be a resident of a particular state to contribute to that state’s plan.
The money you save in a 529 account is allowed to grow on a tax-deferred basis. That means you won’t pay taxes on earnings until you withdraw your college savings. But as long as those withdrawals are used to pay qualified education expenses, they’re tax-free. Qualified withdrawals include things like tuition, fees and room and board paid to a school that’s eligible to participate in federal student aid programs.
In terms of how much you can contribute to a 529 plan, there are two thresholds to keep in mind. The first is the annual gift tax exclusion limit. This limit says that you can gift someone up to a certain amount of money without triggering the gift tax. For 2021, that limit is $16,000 but if you’re married and file a joint return, you and your spouse can split your gift and contribute up to $32,000 to a 529 savings plan per child.
The other threshold is the lifetime contribution limit set by the plan itself. This is the amount you can contribute to any single 529 plan on behalf of a named beneficiary over the course of your lifetime. Every plan is different in this regard, though some allow upper lifetime contribution limits in the $300,000-or-higher range.
Can You Get a Federal 529 Tax Deduction?
The Internal Revenue Code offers several tax benefits to 529 savers, including the previously mentioned tax-deferred growth and tax-free withdrawals for qualified education expenses. But currently, there is no federal 529 tax deduction available. There, are, however, some other tax breaks associated with education expenses that you may be eligible for. For instance, the student loan interest deduction allows you to deduct interest paid toward eligible student loans. You can claim this deduction even if you don’t itemize on Schedule A but you must be within certain income thresholds to qualify. The maximum deduction allowed is the lessor of $2,500 or the amount of interest you actually paid during the year.
The American Opportunity Credit and the Lifetime Learning Credit can also help reduce your tax liability if you paid out-of-pocket higher education costs. While a tax deduction reduces your taxable income for the year, tax credits reduce what you owe in taxes on a dollar-for-dollar basis. One thing to note is that the IRS doesn’t allow you to claim both of these credits for the same expenses in any given tax year.
The federal CARES Act also provides another tax benefit, albeit somewhat indirectly. As part of the Act, employers can offer up to $5,250 in nontaxable benefits to help employees repay their student loan debt or pay tuition costs. This provision is good through January 2026.
Can You Get a State 529 Tax Deduction?
State tax laws may be more favorable when it comes to getting a deduction for 529 plan contributions. More than 30 states offer some type of tax break in the form of a deduction or credit for 529 plan savers. Currently, the only states that don’t allow some type of tax incentive for contributing to a college savings account include:
- New Hampshire
- North Carolina
- South Dakota
- West Virginia
Whether you can get a 529 tax deduction or a tax credit depends on where you live and which state’s plan you contribute. Some states, for example, allow you to claim a tax deduction or credit, regardless of which state’s plan you’re enrolled in. Others only allow a tax benefit if you’re making contributions to your home state’s plan.
The value of tax deductions and tax credits for 529 contributions also varies from state to state. In Massachusetts, for example, the maximum deduction allowed for a single filer is $1,000 or $2,000 for joint filers, but in New Mexico the full contribution amount for the year is tax deductible. In states that offer a tax credit in place of a deduction, the credit can range from 5% to 50% of a specific dollar amount of contributions.
How to Claim a 529 Plan Deduction
If you’re interested in deducting 529 plan contributions on your taxes, the first step is determining whether you live in a state that allows it. If you do, the next step is estimating how much of your contributions you can get deduct. Again, this can vary based on the state deduction limits or requirements and your filing status.
You’ll need to add up the amount you contributed to each 529 plan you own. You should be able to get this information from your plan’s annual statement. If you’re filing your state taxes using an online tax software program, there should be a question about 529 plan contributions included. You can then enter in the amount you contributed so the program can calculate what amount, if any, is deductible.
Is Contributing to a 529 College Savings Plan Worth It?
If you don’t get a federal or state tax deduction for 529 plan contributions, you may be wondering whether it’s even worth your time to open one. While missing out on a deduction for contributions isn’t that great, the other tax benefits you can enjoy can make up for it. Tax-deferred growth and tax-free withdrawals can be a great incentive to save in a 529 plan versus parking money in a regular savings account or CDs.
When opening a 529 college savings plan, be sure to compare your state’s plan against those offered by other states. Specifically, consider the range of investment options offered, lifetime and annual contribution limits and any fees the plan may charge to find the one that’s the best fit for your needs.
The Bottom Line
While a 529 plan tax deduction isn’t an option for federal taxes, you may be able to snag one at the state level. Even if you don’t, however, it’s still worth weighing the benefits of including a 529 college savings account in your long-term financial plan when saving money for education costs.
Tips for College Planning
- Aside from a 529 college savings plan, you may also consider other ways to save for higher education, such as a Coverdell ESA or a Roth IRA. A Coverdell ESA allows you to save up to $2,000 per year, per child until the child turns 18. You can also use a Roth IRA in a pinch to pay for college.
- Consider talking to a financial advisor about the pros and cons of contributing to a 529 college savings plan If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. In just a few minutes SmartAsset’s financial advisor matching tool can connect you with several advisors in your area. If you’re ready, get started now.
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