Find out Which States Offer the Best 529 Tax Advantages
A popular method of saving for college is the 529 plan, with most states in the Union offering at least one option. With a 529 plan, your college savings grows tax-deferred and you pay no federal tax on withdrawals for qualified higher education expenses. As of 2018, withdrawals are no longer limited to post-secondary education expenses and can also include K – 12 private school education.
There is no federal deduction for contributions to a 529 account. At the federal level, contributors should keep in mind that contributions may be subject to the federal gift tax laws. At the state level, many states offer a deduction and a few states offer a credit. Deductions will typically only be relevant if they help the contributor to bypass the state’s standard deduction level. Credits offer the greatest advantage as they are subtracted from the amount of tax a taxpayer owes overall.
States with the Best 529 Tax Advantages
Six states offer tax parity which allows taxpayers to receive a state tax break on contributions to any 529 plan in the U.S. Four states offer tax credits. States with tax parity and tax credits make them obvious front-runners for the best advantages.
Tax Parity Deductions
Arizona, Kansas, Minnesota, Missouri, Montana, and Pennsylvania are the six states that offer residents tax deductions in 2018 for contributions to any state’s 529 plan, not just their own. This gives residents of these states the freedom to choose the state plan with the lowest fees and the best investment options while still getting a state tax deduction.
Out of these six states, the best is Pennsylvania which allows a deduction of up to $14,000 for individual filers. For a couple who is married filing jointly, that's a deduction of up to $28,000.
Indiana, Utah, Vermont, and Minnesota are the four states offering a tax credit. Tax credits for these states include the following:
- Indiana: Any contributor; 20% tax credit on contributions up to $5,000; maximum credit is $1,000
- Utah: Account owner only; 5% tax credit on contributions up to $1,920 (filing individually), $3,840 (filing jointly); maximum credit is $96 (individual), $192 (jointly)
- Vermont: Account owner only; 10% tax credit on contributions up to $2,500 (individual) $5,000 (jointly); maximum credit is $250 (individual), $500 (jointly)
- Minnesota: Any contributor; contributors can opt for either a deduction or credit; $1,500 (individual), $3,000 (jointly)
Other States Offering Deductions
As for the rest of the states, you can only deduct amounts contributed to a state plan where deductions are available. Therefore, the best states from a tax perspective will be those that offer the biggest deductions. While most states have dollar limits on 529 deductions, Colorado, New Mexico, South Carolina, and West Virginia allow you to deduct the full amount of contributions to their respective 529 plans.
States with No Tax Savings
Some states have no deduction or credit for 529 plan contributions. If you are a resident of one of these states there are still plenty of 529 plan options but no tax breaks for utilizing them. If you live in one of these states, your best option is to choose a state plan that has low fees and offers the type of investment options you want. In most cases, you do not need to be a resident of a state to invest in a state plan.
Which State Plan to Choose
Tax deductions and credits are great, but they may not add up to much if your state’s 529 plan charges high fees. Be sure to check on the fees for your state’s plan (and whether they waive those fees for in-state residents). Shop around and compare those fees to the fees of other states. Other important considerations are investment performance and whether the plan includes plenty of investment options, such as target-date funds.
Expert Tip: Note: Savingforcollege.com is a great resource for researching the plan details of each state.