Tax Deductions for Education Expenses in Connecticut

Rules for Claiming the Section 529 Deduction

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The state of Connecticut offers one of the higher deduction limits for residents who contribute to a Section 529 plan. Single taxpayers can deduct up to $5,000 in CHET contributions ($10,000 for couples filing jointly). Making the Connecticut CHET Plan even more attractive is the fact that residents who contribute more than the maximum deduction for any year are permitted to “carry it forward” for up to five years.

In other words, a single parent who makes a $6,000 contribution to the Connecticut CHET plan could deduct $5,000 for this year, and the remainder the following year.

As with most states, distributions from the Connecticut Section 529 plan that are used for qualified education expenses are not subject to taxation.

Value of the Connecticut Section 529 Tax Deduction

If you are a Connecticut resident trying to choose between a Section 529 plan and another college savings vehicle, you need to account for the potential tax savings of contributing to the Connecticut CHET Plan. Remember, Connecticut residents only receive a deduction for contributing to Connecticut’s CHET Savings Plan, not plans from other states.

Considering that the top income tax bracket for Connecticut residents is 6.99 percent, a contribution of $5,000 could potentially save $350 at tax time. In other words, receiving the deduction could be similar to a 6.99 percent bonus on the amount contributed.

Qualifying for the CHET Tax Deduction

Like other 529 college savings plans, CHET is designed so that the account holder saves more money over the life of the account. Earnings in a 529 plan are not subject to state or federal taxes, and Connecticut's plan is no different. The withdrawals from a 529 plan are also tax-free at both the federal and state level, as long as they're used for qualified higher education expenses.

That doesn't mean solely tuition; 529 funds can be used for some room and board costs, fees, books, and other supplies such as computers, printers, and Internet and technology fees.

If you live in Connecticut, but your child wants to go to school in another state, your 529 plan will still be available to cover the costs. The funds can be applied to accredited colleges and universities in the United States and some colleges in other countries.

Anyone can contribute to a Section 529 plan, parents, grandparents, or other relatives, and there's no income limitation. Regardless of how much money they make, contributors to a 529 plan need to be aware of U.S. gift tax limitations and understand how larger gifts may affect their eventual estate taxation and any other potential tax situations.

Claiming the CHET Deduction

Contributions by residents to a Connecticut Section 529 plan are deducted on Line 48 of the Connecticut Individual Income Tax Return (Form CT-1040).