Opening a 529 plan is a tax-advantaged way to set aside money for college. The money you contribute can grow tax-deferred and qualified withdrawals are tax-free. While there is no federal tax break for making 529 plan contributions, you may be able to claim one at the state level. Breaking down the 529 tax deduction by state can give you an idea of how you might be able to benefit when saving for college. Need help creating a college savings plan? Get connected with a financial advisor near you to learn more.
Understanding 529 Plan Tax Deductions
Tax deductions are amounts that reduce your taxable income for the year. You can claim both federal and state tax deductions. They’re different from tax credits, which reduce your tax liability on a dollar-for-dollar basis.
Claiming tax deductions can help you to pay less in taxes or garner a bigger refund if you typically get money back at the state or federal level. Some deductions are above-the-line, while others require you to itemize on your tax return. Credits, meanwhile, lower your tax bill.
The federal government offers some tax deductions for education, but a deduction for 529 plan contributions isn’t one of them. You can, however, deduct interest paid to student loans. The American Opportunity Tax Credit and the Lifetime Learning Tax Credit can also be claimed to offset higher education expenses.
529 Tax Deduction by State
Every state offers at least one 529 plan, but states are not required to offer a tax deduction or other tax breaks for education. That being said, a number of states do offer deductions if you’re making contributions to a 529 plan. States can also offer credits or other tax breaks as an incentive to save for college.
Nine states do not have income tax which means they don’t offer a 529 plan deduction. Those states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. California, Hawaii and Kentucky do not offer any type of 529 tax deduction but do assess income tax.
This table breaks down the 529 tax deduction by state.
529 Tax Deductions by State
|Alabama||$5,000 single filers; $10,000 joint filers|
|Arizona||$2,000 single or head of household; $4,000 joint filers|
|Arkansas||$5,000 single filers; $10,000 joint filers|
|Connecticut||$5,000 single filers; $10,000 joint filers|
|Delaware||$1,000 single filers; $2,000 joint filers|
|Georgia||$4,000 single filers; $8,000 joint filers|
|Idaho||$6,000 single filers; $12,000 joint filers|
|Illinois||$10,000 single filers; $20,000 joint filers|
|Indiana||20% tax credit on contributions (maximum credit $1,500)|
|Iowa||$3,785 per beneficiary|
|Kansas||$3,000 single filers; $6,000 joint filers|
|Louisiana||$2,400 single filers; $4,800 joint filers|
|Maine||Up to $1,000 per beneficiary|
|Maryland||$2,500 single filers; $5,000 joint filers|
|Massachusetts||$1,000 single filers; $2,000 joint filers|
|Michigan||$5,000 single filers; $10,000 joint filers|
|Minnesota||$1,500 single filers; $3,000 joint filers|
|Mississippi||$10,000 single filers; $20,000 joint filers|
|Missouri||$8,000 single filers; $16,000 joint filers|
|Montana||$3,000 single filers; $6,000 joint filers|
|Nebraska||$10,000 single filers; $5,000 married filing separately|
|New Jersey||$10,000 per taxpayer|
|New Mexico||Full contribution|
|New York||$5,000 single filers; $10,000 joint filers|
|North Dakota||$5,000 single filers; $10,000 joint filers|
|Ohio||Up to $4,000 per beneficiary|
|Oklahoma||$10,000 single filers; $20,000 joint filers|
|Oregon||$150 tax credit single filers; $300 tax credit joint filers|
|Pennsylvania||$17,000 single filers; $34,000 joint filers|
|Rhode Island||$500 single filers; $1,000 joint filers|
|South Carolina||Full contribution|
|Utah||4.95% tax credit per beneficiary|
|Vermont||10% credit on up to $2,500 for single filers; $5,000 joint filers (maximum $250 per taxpayer, per beneficiary; VHEIP is the only eligible plan)|
|Virginia||Up to $4,000 per account|
|Washington, D.C.||$4,000 single filers; $8,000 joint filers|
|West Virginia||Full contribution|
|Wisconsin||$3,860 per beneficiary; $1,930 for divorced parents or those married filing separately|
Claiming 529 Plan Tax Benefits
To claim a tax deduction or credit for 529 plan contributions, you must live and file taxes in a state that offers these benefits. You must also be eligible to get a tax break, based on your relationship with the account beneficiary.
In most states, any contributor to a 529 plan can claim a tax break, regardless of whether they’re the account owner or not. However, some states limit tax benefits to account owners only. That means grandparents, aunts and uncles or other contributors would be excluded from deducting contributions or claiming tax credits.
The good news is that there are no time limits on claiming education tax benefits associated with a 529 college savings plan if you’re eligible to do so. Unlike Coverdell Education Savings Accounts (ESAs), which require you to withdraw all assets once the beneficiary turns 30, 529 plan money can stay in the account indefinitely. So, as long as you’re making contributions you could still claim a deduction or tax credit if you’re eligible.
Is Contributing to a 529 College Savings Plan Worth It?
Saving money in a 529 plan can be worth it for a few reasons, starting with the laundry list of tax breaks they offer. Contributions grow on a tax-deferred basis, so you’re not having to pay tax on any earnings while the money is in the account. Any qualified withdrawals are tax-free, as long as you use them for eligible higher education expenses. You can also withdraw up to $10,000 without a tax penalty to pay for qualified expenses for grades K-12.
You can open a 529 plan and contribute money to it on behalf of any eligible beneficiary, including yourself or your spouse. Should your beneficiary decide not to go to college or if they don’t use up all of their savings, you could transfer the money to a different beneficiary. And as outlined in the table above, some states offer tax breaks for college savings in the form of deductions or credits.
Aside from those benefits, a 529 plan can offer a better rate of return on your money compared to keeping money in a high-yield savings account or even a CD. They also allow for more flexibility than savings bonds. And while you could tap into an Individual Retirement Account (IRA) to pay for college, that could shortchange your retirement savings and potentially trigger some tax consequences.
The Bottom Line
Getting a head start on college planning can help you to be better prepared when it’s time for your student to head off to school. Saving money in a 529 plan can benefit you at tax time and your money may have more room to grow than it would sitting in a bank account. Reviewing your 529 tax deduction by state can help you figure out how much of an additional tax advantage you might get from saving.
Financial Planning Tips
- If you’re ready to start saving for college but you don’t know how to approach it, getting professional advice can help. A financial advisor can walk you through different college savings options so you can choose the one that best fits your needs and situation. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When comparing 529 savings plans, remember that you’re not locked into choosing your state’s plan. You could invest in a different state’s plan if you prefer the range of investment options offered or if another plan allows for higher lifetime contribution limits. Keep in mind, however, that your choice of plan may affect your ability to deduct those contributions on your state income tax return.
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