Here’s what else you need to know about 529 plans and how they differ from state to state.
Federal Deductions for 529 Plans
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 federal gift tax laws. In tax year 2022, you can give up to $16,000 to someone before the gift tax kicks in, or $32,000 for married couples combining gifts. The limit is $17,000 ($34,000 for married couples filing jointly) in 2023. At the state level, many states offer a deduction, and a few states offer a credit. Deductions typically will only be relevant if they help the contributor 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.
The Best 529 Tax Advantages Offered
Over 30 states offer a tax deduction that allows taxpayers to receive a state tax break on contributions to 529 plans. Three states offer tax credits. Seven states offer tax parity on contributions to plans in other states. States with tax, deductions, tax parity, and tax credits make them obvious front-runners for the best advantages.
Tax Parity
There are seven states that offer their residents tax parity for contributions to any state’s 529 plan, not just their own: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. This gives residents of these states the freedom to pick and choose among state plans—seeking out those with the lowest fees and the best investment options—while still getting a state tax deduction.
Tax Credits
Indiana, Utah, and Vermont are the three states offering a tax credit, which include the following:
Indiana: Any contributor can claim a 20% tax credit on contributions up to $5,000 for a maximum credit of $1,000.Utah: The contributor can claim a 4.85% tax credit per beneficiary on contributions up to $2,130 (for individual filers) or $4,260 (for those filing jointly) for a maximum credit of $103.30 (individual) or $206.61 (joint) for 2022.Vermont: The contributor can claim a 10% tax credit per beneficiary on contributions up to $2,500 (for individual filers) or $5,000 (for those filing jointly) for a maximum credit of $250 (individual) or $500 (joint).
Tax Deductions
As for the rest of the states with tax savings, 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. However, Colorado limits deduction amounts to the taxpayer’s total taxable income capped at $20,000 for single and $30,000 for joint filers.
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 its 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 it waives those fees for in-state residents). Shop around, and compare those fees to those of other states. Other important considerations are investment performance and whether a plan includes investment options, such as target-date funds.
