What is a 529 plan?
A 529 is a tax-advantaged college savings plan that can now be used for K-12 tuition as well. You make after-tax contributions and your earnings will not be taxed at withdrawal as long as you use the funds to pay for qualified education expenses. These plans also have no income limits and generous contribution guidelines.
There are two main types of 529 plans: college savings plans and prepaid tuition plans. For this article, we will be focusing on the college savings plan.
529 State Tax Benefits
529 plans are a great tool for the college planning puzzle. But more often than not, I find that most people are not aware of all the advantages and disadvantages of their current 529 plan.
One of the most overlooked pieces of 529 plans is that many states offer a state income tax deduction or credit for utilizing the plan that is offered by your state. Over 30 states, including the District of Columbia, offer a state income tax deduction or tax credit for 529 plan contributions.
Furthermore, there are currently seven tax parity states that offer a state income tax benefit for contributions to any 529 plan, regardless of where you reside:
- Arizona
- Arkansas
- Kansas
- Minnesota
- Missouri
- Montana
- Pennsylvania
In other words, if you live in the above-mentioned states, you can use another state’s 529 plan and still get a tax deduction in your home state.
Most of the time, I find that the majority of people fixate on finding the 529 plan that has the lowest costs/fees. This is a great starting place, but you have to do your research to make sure you aren’t missing out on any tax advantages.
Taking a Closer Look: Alabama 529 Tax Deductions
For example, each year, Alabama taxpayers can deduct contributions made to their College Counts 529 Plan up to the following:
- $5,000 for single filers
- $10,000 for married couples, filing jointly when both spouses contribute
- December 31 contribution deadline
So, if a family contributes $10,000 to their child’s/children’s 529 plans utilizing the plan offered by the state of Alabama, they will receive a state income tax deduction of $10,000.
However, if you are a resident of Alabama but use a plan that is not offered by the state of Alabama, then you are ineligible for the state income tax deduction.
When it comes time to decide which 529 plan is right for you, make sure you do your research to make sure your contributions are getting the most bang for their buck! With the cost of college being about $26,000 per year for a public in-state university, this state income tax deduction can go a long way when saving for college.
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