If you live in Wisconsin and know that you'll be funding a child's college education one day, it's imperative that you know about the tax benefits available to you through the state's 529 college savings program. So, what's in store for you if you become a contributor to the plan? This overview provides a snapshot of the WI 529 deduction, its potential value to taxpayers, and instructions for claiming the deduction.
Tax Benefits Available to You
In 2021, Wisconsin residents who contribute to a 529 plan in the state can deduct up to $3,380 from their Wisconsin income tax return for each account they contribute to on behalf of a future college student, such as a spouse, child, grandchild, great-grandchild, niece, or nephew.
Previously, only close relatives could be contributors, but in 2014 the state expanded the group of individuals who could contribute to those outside of a future student's next of kin. This puts Wisconsin in line with other states, which typically allow anyone—from close family members to family friends—to contribute to a 529 plan on behalf of a future student.
However, Wisconsin departs from other states in that it does not allow married couples filing jointly to double their deduction, although contributions above the annual limit may be carried forward to be applied in subsequent tax years. In a state such as New York, for example, married couples can file jointly. Both single and married couples also may make a larger deduction ($5,000 for individuals and $10,000 for married couples). Accordingly, this stands out as a disadvantage of Wisconsin's college savings program.
Value of the WI 529 Plan Tax Deduction
Wisconsin residents trying to decide whether to use their state's 529 plan versus another state's plan need to account for the potential tax savings of contributing to their in-state plan. Considering that the top Wisconsin income tax rate is 7.65%, each $3,340 contributed can save a taxpayer up to $255.51 at tax time.
Wisconsin does not currently offer a tax deduction to residents contributing to out-of-state plans or other types of college savings accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account. Many other states also do not offer tax deductions for these types of accounts, so Wisconsin is not unique in this regard.
The state does note, "Incoming rollovers from other states' 529 plans are accepted. The portion that is principal or contributions may qualify for reducing your Wisconsin taxable income, including carry-forward for subsequent years; the portion attributed to growth is not eligible."
Claiming the Deduction
Residents can claim the Wisconsin 529 plan tax deduction on Wisconsin Form 1. The Wisconsin college savings program deduction is an "above the line" income adjustment, meaning residents can claim it even if they do not itemize their other deductions (opting for the standard deduction). There is no income phase-out on the 529 plan tax deduction.
Reference and Documentation
Additional information on Wisconsin's college savings program can be found on the Wisconsin Department of Revenue website.