Tax Deductions For 529 Plan Contributions By State

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Source: The College Investor

One of the big perks of using a 529 plan to save for college is that many states offer tax deductions for 529 plan contributions. Other states offer tax credits, and some even will allow contributions to any state's plan (this is called tax parity) But, like anything, there are rules that apply.

Some states require you to contribute to their state's plan, while other states allow you to take the tax deduction for contributions to any state's plan. Finally, there are (sadly) states that don't offer any incentives for contributions.

Also, the rules for withdraw can also impact your taxes. Make sure you understand the differences in qualified 529 plan withdrawals so you aren't paying taxes and penalties!

What Is a 529 Plan?

A 529 plan allows you to contribute money for educational use. The funds must be used for education, which includes college or K–12 tuition.

The owner of the account remains in control of the account, while the money is used for a beneficiary (typically the child). This is different from a UGMA or UTMA account, which allows the beneficiary to take control of the account once they reach legal age.

Related: What Is A 529 Plan?

What Is the 529 Plan Contribution Tax Deduction?

Many 529 plans do offer state tax deductions on contributions. Some states even offer a tax credit. But not every state offers the deduction. Plus, there are certain rules you need to follow.

For example, most states only give you the tax credit or tax deduction if you contribute to your state's plan. However, a few states offer "parity", meaning the allow you to get a tax deduction regardless of which state's plan you contribute to.

529 plans do not offer federal contribution tax deductions.

How Do I Open an Account?

You can open a 529 plan with your brokerage or by searching for 529 plans. Once you find one you like, you’ll choose an in-state or out-of-state plan. After the account is opened, you can then choose one of the investment options offered by the plan.

Check out this list here and see where to open the 529 plan that makes the most sense for you:

529 Tax Benefits by State

For most states, you must contribute to your state’s 529 plan (as opposed to an out-of-state plan) to receive any state tax benefit. However, seven states offer tax parity, which allows you to contribute to any 529 state plans.

529 Tax Parity States

These seven states that provide a tax deduction for contributions to any state plan include:

Arizona: $2,000 single or head of household, and $4,000 for joint filersArkansas: $5,000 for single filers, and $10,000 for married filersKansas: $3,000 for single filers, and $6,000 for married filersMinnesota: $1,500 for single filers, and $3,000 for married filersMissouri: $8,000 for single filers, and $16,000 for joint filersMontana: $3,000 for single filers, and $6,000 for joint filersPennsylvania: $16,000 for single filers, and $32,000 for joint filers

529 Plan Tax Deduction States

The following states offer deductions:

Alabama: $5,000 for single filers, and $10,000 for joint filersColorado: $22,700 for single filers, and $34,000 for married filersConnecticut: $5,000 for single filers, and $10,000 for married filers Delaware: $1,000 for single filers, and $2,000 for joint filersGeorgia: $4,000 for single filers, and $8,000 for joint filersIdaho: $6,000 for single filers, and $12,000 for joint filersIllinois: $10,000 for single filers, and $20,000 for joint filersIowa: $5,500 for single filers, and $11,000 for joint filersLouisiana: $2,400 for single filers, and $4,800 for joint filersMaryland: $2,500 for single filers, and $5,000 for joint filersMassachusetts: $1,000 for single filers, and $2,000 for joint filersMichigan: $5,000 for single filers, and $10,000 for joint filersMississippi: $10,000 for single filers, and $20,000 for joint filersNebraska: $10,000 for single and married filers, $5,000 if filing separateNew Jersey: $10,000 per taxpayer, per yearNew Mexico: Full amount of contribution with no limitNew York: $5,000 for single filers, and $10,000 for joint filersNorth Dakota: $5,000 for single filers, and $10,000 for joint filersOhio: $4,000 per year regardless of filing statusOklahoma: $10,000 for single filers, and $20,000 for joint filersRhode Island: $500 for single filers, and $1,000 for joint filersSouth Carolina: Full amount of contribution with no limitVirginia: $4,000 per year regardless of filing statusWashington, D.C.: $4,000 for single filers, and $8,000 for joint filersWest Virginia: Full amount of contribution with no limitWisconsin: $4,000 per dependent beneficiary, self or grandchild

529 Plan Tax Credit States

The following states offer tax credits:

Indiana: 20% tax credit on contributions up to $5,000Oregon: $170 for single filers, $340 for joint filersUtah: 4.85% of contribution, up to $112.06 for single filers, and $224.13 for married filersVermont: 10% tax credit, up to $250 for single filers, and $500 for married filers

No 529 Plan Tax Benefit States

If your state has no income tax, the 529 plan tax deduction doesn’t apply. These states include:

Florida Nevada Texas South Dakota Washington Wyoming

Some states do have income taxes but no 529 plan tax deduction. They include:

California Hawaii Kentucky Maine New Hampshire North Carolina Tennessee

Find your state in our full 529 plan guide here >>

Is It Worth It?

If you want control over the money you’re putting toward a beneficiary’s college tuition, then yes — it is worth it. Be sure the funds will eventually be used for education. If not, you’ll incur a 10% penalty, plus you’ll be taxed at your ordinary income tax rate for non-educational use of the funds.

Editor: Claire Tak Reviewed by: Colin Graves

The post Tax Deductions For 529 Plan Contributions By State appeared first on The College Investor.

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