A popular method of saving for college is the 529 plan with forty-nine states and the District of Columbia 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.
There is no federal deduction for contributions to a 529 account, but most states allow either a deduction or a credit for 529 contributions.
Which States Have The Best Deductions?
Arizona, Kansas, Maine, and Pennsylvania are obvious front runners because residents of these states receive tax deductions for contributions to any state’s 529 plan, not just their own. This gives residents 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 four states the best is Pennsylvania which allows a deduction of up to $13,000 per beneficiary per contributor. For a couple who is married filing jointly, that's a deduciton of up to $26,000 per beneficiary.
As for the rest of the states, you can only deduct amounts contributed to their state plan, so the best states from a tax perspective will be those that offer the biggest deductions. While most states have dollar limits on 529 deductions, New Mexico, Colorado, and South Carolina allow you to deduct the full amount of contributions to their respective 529 plans.
State Tax Credits for 529 Contributions
Tax credits reduce the tax you actually owe, so they can be even more valuable than a deduction. Currently, three states have tax credits for 529 plan contributions.
- Indiana allows you to take a tax credit equal to 20% of your contributions for a maximum credit of $1,000 (up to $5,000 in contributions).
- Utah has a 5% tax credit on contributions of up to $1,740 for single taxpayers ($3,480 if filing jointly) per beneficiary. That comes out to a credit of $87 per beneficiary for single filers and $174 per beneficiary for joint filers.
- Vermont offers a 10% tax credit on up to $2,500 in contributions per beneficiary ($250 credit per beneficiary).
Most Taxing States for College Savers
Eight states: Alabama, California, Delaware, Hawaii, Kentucky, New Jersey, Massachusetts, and Minnesota have no deduction or credit for 529 plan contributions.
These states have 529 plans, but offer no tax incentive for utilizing them. Therefore, 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 their plan.
Which State Plan Should I Choose?
Tax deductions and credits are great, but they may not add up to much if your state’s 529 plan charges huge management 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 age-based portfolios.
More information: Deduction and credit amounts for each state