The Tax Deductions 7 States Offer for 529 Education Savings Plans– February 25, 2019 by Rachel Roan

The 529 education savings plan is often a great way to help children or other beneficiaries pay for educational expenses. And thanks to the Tax Cuts and Jobs Act, some of the expenses covered now include those beginning as early as kindergarten.
 
>> Learn more about how 529 plans work in “Understanding the ‘Gift’ of a 529 Education Savings Plan.”
 
But another benefit to be mindful of is the related tax deduction many states also make available when using their state-sponsored plans. In fact, most states that have an income tax also have a deduction available for contributions to their specific 529 Savings Plan. Below is an overview of what seven states in particular have to offer. 

Illinois

  • Illinois taxpayers who contribute to an Illinois Bright Start or Bright Direction account are eligible to deduct up to $10,000 (individuals) or $20,000 (married filing jointly) per year.
  • Illinois does not consider distributions for K-12 tuition to be tax-free distributions. Taxpayers who withdrawal funds for K-12 tuition will not pay federal tax but will be subject to Illinois income tax on the account earnings portion of the withdrawal and potential state penalties if a state deduction was taken on the contribution to the account. 

Maryland

  • Maryland taxpayers who contribute to a Maryland Prepaid College Trust are eligible to deduct up to $2,500 per account, per year. Taxpayers who contribute to a Maryland College Investment Plan are eligible to deduct up to $2,500 per beneficiary, per year from their Maryland taxable income. Taxpayers who contribute more than the deductible amount can carry forward the excess to future years with no expiration.
  • Maryland has updated its rules to include tax free distributions for K-12 tuition expenses.
  • Contributions to plan accounts must be made by December 31 to be deducted for the current tax year. 

Michigan

  • Michigan taxpayers who contribute to a Michigan Education Savings Program are eligible to deduct up to $5,000 (individuals) or $10,000 (married filing jointly) for the year from their Michigan taxable income.
  • Michigan has updated its rules to include tax-free distributions for K-12 tuition expenses but does not allow qualified withdrawals to be used for private schools.
  • Contributions to plan accounts must be made by December 31 to be deducted for the current tax year. 

New York

  • New York taxpayers who contribute to a New York Direct plan account are eligible to deduct up to $5,000 (individuals) or $10,000 (married filing jointly) when contributing to a plan they own.
  • New York does not consider distributions for K-12 tuition to be tax-free distributions. Taxpayers who withdrawal funds for K-12 tuition will not pay federal tax but will be subject to New York income tax on the account earnings portion of the withdrawal.
  • Contributions to plan accounts must be made by December 31 to be deducted for the current tax year. 

Ohio

  • Ohio taxpayers who contribute to an Ohio College Advantage 529 Savings Plan are eligible to deduct up to a maximum of $4,000 (up from $2,000 in 2017) per beneficiary, per year from their Ohio taxable income. Taxpayers who contribute more than the deductible amount can carry forward the excess to future years with no expiration.
  • Ohio has updated its rules to include tax-free distributions for K-12 tuition expenses.
  • Contributions to plan accounts must be made by December 31 to be deducted for the current tax year. 

Pennsylvania

  • Pennsylvania taxpayers who contribute to a PA 529 Plan are eligible to deduct up to $15,000 per beneficiary, per year (individuals) or up to $30,000 per beneficiary, per year (married filing jointly) from their Pennsylvania taxable income provided each spouse has taxable income of at least $15,000.
  • Pennsylvania has updated its rules to include tax-free distributions for K-12 tuition expenses.
  • Contributions to plan accounts must be made by December 31 to be deducted for the current tax year. 

Wisconsin

  • Wisconsin taxpayers who contribute to a Wisconsin 529 Savings Plan are eligible to deduct up to a maximum of $3,200 per beneficiary, per year from their Wisconsin taxable income. Taxpayers who contribute more than the deductible amount can carry forward the excess to future years with no expiration.
  • Wisconsin has updated its rules to include tax-free distributions for K-12 tuition expenses.
  • Contributions can be made up until April 15 of the following year to be deducted on the current year’s tax return.

While the information above covers only a handful of the many states offering additional deductions for the 529 Savings Plan, also be mindful of the ones that do not offer any — California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey, North Carolina and Tennessee.
 
The most important takeaway? If you are looking to take advantage of the $10,000 qualified annual distributions for K-12 tuition expenses, pay special attention to your own state (or the plan in which you are enrolled). Find out if your plan state has updated its plan to include the new rules so you can take full advantage.
 
Please contact a member of your service team, or contact Rachel Roan at rroan@cohencpa.com or Alane Boffa at aboffa@cohencpa.com for further discussion. 
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.