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State Tax Deductions for 529 Contributions

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Many states give the account owner a full or partial state income tax deductions for their contributions to the state's section 529 plans. So far a total of 34 states and the District of Columbia offer such a deduction.

California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey and Tennessee currently have state income taxes but do not offer a state income tax deduction or tax credit for contributions to the state's 529 college savings plan. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not have state income taxes.

Contributions in some states may be tax deductible on even a short-term basis, leading to a state income tax loophole.

See also Fastweb's article Free Money for College Savings for a list of grant programs that provide matching contributions to the college savings plans of low and moderate income families and grant programs that provide one-time college savings plan grants to newborn children.

Deductibility of State 529 Plan Contributions

The following table shows the limits, if any, on state income tax deductions for section 529 plan contributions. If there is a limit on the amount of the deduction, many states allow carry forward of excess contributions to future income tax returns.

State 529 Deduction
Alabama$5,000 per parent ($10,000 joint)
AlaskaNo state income tax
Arizona$2,000 single or head of household/$4,000 joint (any state plan)
Arkansas$5,000 per parent ($10,000 joint)
California--
ColoradoFull amount of contribution
Connecticut$5,000 per parent ($10,000 joint), 5 year carryforward on excess contributions
Delaware--
FloridaNo state income tax
Georgia$2,000 per beneficiary
Hawaii--
Idaho$4,000 single/$8,000 joint
Illinois$10,000 single/$20,000 joint per beneficiary
Indiana20% tax credit on contributions up to $5,000 ($1,000 maximum credit)
Iowa$3,163 single/$6,326 joint per account
Kansas$3,000 single/$6,000 joint per beneficiary (any state plan), above the line exclusion from income
Kentucky--
Louisiana$2,400 single/$4,800 joint per beneficiary, above the line exclusion from income, unlimited carryforward of unused deduction into subsequent years
Maine$250 per beneficiary
Maryland$2,500 per account per beneficiary, 10 year carryforward
Massachusetts--
Michigan$5,000 single/$10,000 joint, above the line exclusion from income
Minnesota--
Mississippi$10,000 single/$20,000 joint, above the line exclusion from income
Missouri$8,000 single/$16,000 joint, above the line exclusion from income
Montana$3,000 single/$6,000 joint, above the line exclusion from income
Nebraska$10,000 per tax return ($5,000 if filing separate), above the line exclusion from income
NevadaNo state income tax
New Hampshire--
New Jersey--
New MexicoFull amount of contribution, above the line exclusion from income
New York$5,000 single/$10,000 joint, above the line exclusion from income
North Carolina$2,500 single/$5,000 joint, above the line exclusion from income
North Dakota$5,000 single/$10,000 joint
Ohio$2,000 per beneficiary per contributor or married couple, above the line exclusion from income, unlimited carryforward of excess contributions
Oklahoma$10,000 single/$20,000 joint per beneficiary, above the line exclusion from income, five-year carryforward of excess contributions
Oregon$2,265 single/$4,530 joint (i.e., $2,265 per contributor) per year, above the line exclusion from income, four-year carryforward of excess contributions
Pennsylvania$14,000 per contributor/$28,000 joint per beneficiary (any state plan)
Rhode Island$500 single/$1,000 joint, above the line exclusion from income, unlimited carryforward of excess contributions
South CarolinaFull amount of contribution, above the line exclusion from income
South DakotaNo state income tax
Tennessee--
TexasNo state income tax
Utah5% tax credit on contributions of up to $1,900 single/$3,800 joint per beneficiary (credit of $95 single/$190 joint)
Vermont10% tax credit on up to $2,500 in contributions per beneficiary (up to $250 tax credit per taxpayer per beneficiary)
Virginia$4,000 per account per year (no limit age 70 and older), above the line exclusion from income, unlimited carryforward of excess contributions
Washington, DC$4,000 single/$8,000 joint, above the line exclusion from income
WashingtonNo state income tax
West VirginiaFull amount of contribution up to extent of income, above the line exclusion from income, five-year carryforward of excess contributions
Wisconsin$3,000 per dependent beneficiary, self or grandchild, above the line exclusion from income
WyomingNo state income tax

State Income Tax Loophole

While 529 college savings plans are intended to encourage long-term savings, the ability to deduct current contributions creates a loophole that encourages short-term savings. In some states a parent could contribute the current year's college costs to the state's 529 college savings plan in order to qualify for the income tax deduction, and then withdraw the funds a day later to pay the bursar's bill. So long as the distribution is taken to pay for qualified higher education expenses, the parent qualifies for the state income tax deduction. Most states do not have a waiting period on withdrawals. Some states have a one-year waiting period on withdrawals.

Strategies for Using State Income Tax Deductions

If all else is equal, it is better to focus on your state's 529 college savings plan if it offers a full or partial deduction for contributions on your state income tax return. However, if another state's plan has lower fees, it may be better to focus on the lowest fee plan in certain circumstances. (Plans run by Vanguard, TIAA-CREF and Fidelity tend to have the lowest fees.)

If instead of a lump sum contribution you are making annual contributions a greater difference in fees is required for the focus on fees to outweigh the state income tax deduction. A good rule of thumb is to require a difference in fees that is twice the fee difference for a lump sum investment with a 17-year horizon.

 

 
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