How a 529 plan affects your taxes
Key takeaways
- Some states offer 529 plan tax deductions up to certain limits.
- 529 plan contributions and qualified withdrawals are tax-free.
- If you pay state income taxes, you’ll need to report 529 contributions on your tax return as well as any withdrawals for qualified educational expenses.
A 529 plan lets you invest money for future educational expenses. So long as you use the money for education, you won’t owe taxes on the investment gains.
Some states offer further incentives, letting you deduct contributions from your income for tax purposes. While contributions aren’t deductible at the federal level, these state-level deductions can still help you save a lot of money.
Are 529 plan contributions tax deductible?
Tax deductions may be an option with your 529 plan, depending on your state. Contributions to your 529 plan aren’t tax deductible at the federal level, but some states offer a tax deduction for contributions.
A 529 plan’s main benefit is that you can grow your contributions tax-free, and any withdrawals are tax-free as long as you use them for qualifying education expenses.
How much of a 529 plan is tax deductible?
States may offer deductions of up to $10,000 if you’re a single filer and up to $30,000 if you file jointly, though each state has different rules and limits. Some states don’t offer any kind of tax deduction.
| State | Single filers | Joint filers |
|---|---|---|
| Alabama | $5,000 deduction | $10,000 deduction |
| Alaska | No income tax | No income tax |
| Arizona | $2,000 deduction | $4,000 deduction |
| Arkansas | $5,000 deduction | $10,000 deduction |
| California | None | None |
| Colorado | Full amount of contribution | Full amount of contribution |
| Connecticut | $5,000 deduction | $10,000 deduction |
| Delaware | None | None |
| Florida | No income tax | No income tax |
| Georgia | $4,000 deduction | $8,000 deduction |
| Hawaii | None | None |
| Idaho | $6,000 deduction | $12,000 deduction |
| Illinois | $10,000 deduction | $20,000 deduction |
| Indiana | 20% tax credit on contributions up to $5,000 | 20% tax credit on contributions up to $5,000 |
| Iowa | $3,439 deduction | $6,878 deduction |
| Kansas | $3,000 deduction | $6,000 |
| Kentucky | None | None |
| Louisiana | $2,400 deduction | $4,800 deduction |
| Maine | None | None |
| Maryland | $2,500 deduction | $5,000 deduction |
| Massachusetts | $1,000 deduction | $2,000 deduction |
| Michigan | $5,000 deduction | $10,000 deduction |
| Minnesota | $1,500 deduction | $3,000 deduction |
| Mississippi | $10,000 deduction | $20,000 deduction |
| Missouri | $8,000 deduction | $16,000 deduction |
| Montana | $3,000 deduction | $6,000 deduction |
| Nebraska | $10,000 | $10,000 |
| Nevada | No income tax | No income tax |
| New Hampshire | No income tax | No income tax |
| New Jersey | None | None |
| New Mexico | Full amount of contribution | Full amount of contribution |
| New York | $5,000 deduction | $10,000 deduction |
| North Carolina | None | None |
| North Dakota | $5,000 deduction | $10,000 deduction |
| Ohio | $4,000 deduction | $8,000 |
| Oklahoma | $10,000 deduction | $20,000 deduction |
| Oregon | $150 deduction, phases out at $30,000 in income | $300 deduction, phases out at $30,000 in income |
| Pennsylvania | $15,000 deduction | $30,000 deduction |
| Rhode Island | $500 deduction | $1,000 deduction |
| South Carolina | Full amount of contribution | Full amount of contribution |
| South Dakota | No income tax | No income tax |
| Tennessee | No income tax | No income tax |
| Texas | No income tax | No income tax |
| Utah | 5% tax credit on up to $2,040 | 5% tax credit on up to $4,080 |
| Vermont | 10% tax credit on up to $2,500 | 10% tax credit on up to $5,000 |
| Virginia | $2,000 deduction, full amount of contribution for those over 70 | $2,000 deduction, full amount of contribution for those over 70 |
| Washington, D.C. | $4,000 deduction | $8,000 deduction |
| Washington | No income tax | No income tax |
| West Virginia | Full amount of contribution | Full amount of contribution |
| Wisconsin | $3,340 deduction | $3,340 deduction |
| Wyoming | No income tax | No income tax |
Do you have to pay taxes on 529 plan earnings?
Earnings on 529 plans grow tax-free. This means that the more contributions you make, the more opportunity you have to build your or your loved one’s 529 plan without paying taxes. Each state puts a cap on total contributions per beneficiary, however. According to The Tax Adviser, these limits range between $235,000 and $500,000 — more than enough to cover a four-year degree and perhaps grad school, too.
You also won’t need to pay taxes on most withdrawals. As long as you use withdrawals to pay for things like tuition, fees, housing, books and supplies, you won’t be taxed. If you use the money for nonqualified expenses, you will be taxed and subject to a 10 percent penalty.
How to report 529 contributions on your tax return
If you do not exceed $18,000 in contributions to a single beneficiary in a given year, it’s not required to report 529 plan contributions on your federal tax return. However, you’ll need to report them on your state taxes if your state has an income tax. You’ll also need to report any withdrawals not used for qualified educational expenses.
Most states allow you to take a deduction if you invest in a plan offered by that state. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer a deduction regardless of where the plan is from. This means you don’t need to live in the state where the plan is offered to take advantage of a tax deduction.
Tax benefits are usually available to anyone who contributes to a 529 plan, including parents, grandparents and anyone else who contributes to an account.
Because of gift tax laws, you must complete Form 709 when doing your taxes if you contribute more than $18,000 each year to a 529 plan. However, you won’t necessarily be taxed on amounts exceeding $18,000. Those amounts will count against your lifetime gift and estate tax exemption, which currently sits at $13.61 million.
The bottom line
Saving for education through a 529 plan is one way to help lower the burden of borrowing money through federal or private student loans. If you plan on paying for your own or someone else’s education, you will be doing a service by contributing to a 529 plan early and often.
Maximize all the ways a 529 plan can give you tax benefits, including tax-free earnings and potential tax deductions. The beneficiary might reap the biggest financial benefits of the plan, but you’ll get to take advantage of tax benefits.
