Do You Get a Tax Deduction for Contributing to a 529 Plan?

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One of the benefits of paying for college out-of-pocket is the tax deduction. With 529 College Savings Plans, you can save and accrue interest on after-tax dollars. You can use the contributions and earnings tax-free for qualified educational expenses. Owners of 529 plans may also qualify for state-level tax deductions.


Federal Tax Deduction for 529 Plans

Although your contributions to a 529 College Savings Plan are not tax deductible, you still receive a benefit. As an investment account, the 529 plan accrues earnings, which allows the 529 plan to grow tax-free. When it’s time to withdraw these earnings for qualifying educational expenses, you do not have to pay taxes on the distribution.


State Tax Deduction for 529 Plans

Tax deductions for 529 plans are different in every state. Seven states have no state tax, while seven others have a state tax, but don’t offer a deduction on contributions. Most states provide a tax deduction only if you invest in the state plan. Finally, seven states offer a state tax deduction whether you invest in the state-sponsored 529 plan or a 529 plan in a different state.


529 College Savings Plan State Deductions

No state deduction        Deduction for in-state Plan                                           Deduction for any plan

 

Alaska*

Alabama

Nebraska

Arizona

California

Colorado

New Mexico

Arkansas

Delaware

Connecticut

New York

Kansas

Florida*

Washington D.C.

North Dakota

Minnesota

Hawaii

Georgia

Ohio

Missouri

Kentucky

Idaho

Oklahoma

Montana

Maine

Illinois

Oregon

Pennsylvania

Nevada*

Indiana

Rhode Island

 

New Jersey

Iowa

South Carolina

 

North Carolina

Louisiana

Utah

 

South Dakota*

Maine

Vermont

 

Texas*

Maryland

Virginia

 

Washington*

Michigan

West Virginia

 

Wyoming*

Mississippi

Wisconsin

 

*=no state tax

 

Do I Have to Own the Account to Get a Tax Deduction?

It is common for grandparents to contribute to their grandchild’s college education, sometimes in the form of contributions to a 529 plan. Certain states allow anyone who contributes to a 529 plan to take a deduction, while others states only permit a tax deduction for account holders. In some cases, the account holder may be able to deduct contributions from other people. Consult with your tax professional to find out if you can take a deduction.


Beware of Contribution Limits and the Gift Tax

While you certainly reap many benefits by utilizing a 529 plan, you are susceptible to gift tax if you exceed the annual contribution limits. As of 2018, you can contribute up to $15,000 to a 529 plan without being required to pay taxes on the gift. If the gift exceeds this amount, then you are required to pay taxes. Spouses can contribute $15,000 each for a total of $30,000 before taxes.


The gift tax limit applies to any individual contributing to a 529 College Savings Plan of which they are not the beneficiary. Grandparents, aunts, and other contributors will also be subject to the gift tax if they exceed the gift-giving limits.


Another alternative to fund the account and maximize tax-free growth is to opt for a lump-sum gift to the account. You can give a five-year gift at once totaling $75,000, or a couple can contribute $150,000. The benefit of contributing a large lump sum to the account is that it increases earning potential, as more money will be in the account from day one. However, you will not be able to give an additional gift to the same person for the next five years without incurring the gift tax.


Consult Your Tax Professional

As with all tax matters, it’s best to consult your 529 plan administrator and tax professional to determine the specific deductions that you can take. Ultimately, your tax professional is the best person to advise you on which deductions you can get based on your circumstances. The essential thing to remember about tax deductions is to keep good records and retain all documentation related to qualified expenses.

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