Depending on where you live and how your contributions stack up at the end of the year, you may be able to claim a tax credit if you contribute to a 529 plan. If you’re considering opening one to save for your child’s (or your grandchild’s) education, there are a few things you should know when shopping for the best plan.
Now, we aren’t saying to base your plan choice on tax benefits alone. There are many other factors to consider before opening a 529 that’s best for you. Also, it’s important to note that in some states, thanks to compounded earnings, investment returns outperform those in other states. And those earnings may make a potential tax break obsolete. But tax credits are always nice! And, this article provides some basic information on how these plans and their tax breaks can differ from one state to the next.
Tax benefits vary from state-to-state.
Currently, there are 30 states that offer tax benefits for 529 plan contributions in the form of either a deduction or a credit. Most states require the plan be in-state; a few states offer provisions regardless of where the plan is established. But, rest assured that each state has different stipulations for education plans, and you must make sure you know the rules for the one you choose.
You may live in a state that gives full deductions for contributions, or your state may not offer deductions at all. Other states limit how much of your total contributions are eligible for a deduction. There are even several states that allow for either a credit or a deduction based on the taxpayer/contributor’s adjusted gross income (AGI). It’s also worth mentioning that only two states base their tax credits on your net contributions after distributions.
Not one state plan is like another state’s plan—so make sure you educate yourself on your own state’s 529 plan tax benefits so you can take advantage of them when the time comes.
Contributions limits are applied per beneficiary.
Regardless of what state you’re dealing with, any tax benefits you receive are based on the amount you contribute to the 529 plan each year. It’s important to note that contribution limits are not defined by the year (as retirement accounts are) but by the beneficiary. For example, California’s contribution limit is $529,000 per beneficiary—with no limit on how much you can contribute in any given year. However, other states may have higher limits just as others have lower limits. But there is no cap on the beneficiary’s age for eligible taxpayers to claim their tax benefit—they can do so every year they make contributions.
There is no set timeframe to stop making contributions—they can be made, and tax benefits can be claimed, even after the beneficiary starts school. You are also not required to have owned the account for a certain timeframe to take a tax benefit (unless your plan’s in Montana or Wisconsin).
Who can contribute and receive a tax break?
Most often, tax benefits are offered to anyone who contributes to a 529 plan—parents, grandparents, and other loved ones included. But some states, such as Massachusetts and New York, only allow tax benefits for the plan owner (or their spouse) and no one else.
In some states, the amount of contributions eligible for tax breaks is per beneficiary; other states regulate it per taxpayer. When making your choice, this difference is important. If you have multiple children, it might be to your advantage to open a 529 plan for each of them to maximize your income tax benefits.
As you can see, no 529 plan is exactly like another—and the states that govern them have different regulations you must adhere to. We highly recommend you consult with a financial professional when researching the best plan for you. In order to reap the benefits that are best for you, you must choose your plan wisely.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at this state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
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