Summary List Placement
529 plans are state-sponsored investment accounts that allow parents to save for a child’s education. The money grows tax-free within the account, and no taxes are due when the money is withdrawn — as long as it’s for eligible education expenses.
You are not restricted to your own state’s plan. In fact, you can contribute to any state’s 529 plan. However, if you set up a plan in your home state, you may be eligible for a tax break on your contribution.
How 529 plan tax breaks work
529 plan contributions are made with after-tax dollars. That means they don’t qualify for a tax deduction on your federal income taxes.
But 34 states do offer some form of tax relief on state taxes for those contributing to plans. The exact nature of the tax benefits varies.
Some states offer tax credits, while others offer a deduction up to a flat, maximum figure or limit the deduction based on your income.
Whether you are filing as an individual taxpayer or filing jointly also affects the size of your deduction in many states.
Here’s a full list of the states offering 529 plan contributions or tax deductions or benefits as of 2021.
Tax benefits when contributing to another state’s 529 plan
In most cases, you need to contribute to your own state’s 529 plan — that is, the one where you live and pay income taxes — to receive the state tax benefits.
However, there are seven states that offer “tax parity” on your contributions. This means that you’ll receive the same tax benefit when contributing to any 529 college savings account — even if it’s sponsored by another state.
Although you can receive state tax benefits in these seven states when contributing to another state’s 529 plan, some states offer incentives to use their plan instead. For example:
Arkansas offers a larger deduction for those investing in the homegrown Gift529 program — up to $10,000 (joint filers), vs just $6,000 if you invest “abroad.”
Pennsylvania 529 accounts are exempt from state inheritance taxes, are not counted for state college financial aid calculations, and are protected from state-based creditors.
The financial takeaway
529 plans offer attractive tax benefits when saving for educational expenses, including tax-free growth and withdrawals. As a sweetener, many states offer a break on contributions you make to a plan, too.
Most states require you to contribute to your home-state plan to be eligible for tax savings, but seven states offer tax breaks no matter which 529 plan you contribute to.
Related Coverage in Investing:
Opening a Roth IRA for your kids offers investment options, tax-free growth, and a great lesson in how to save
The 529 plans Americans can use to save for college are more flexible than they’ve ever been — and you can use them for student loans
What are the best college-savings investments? 5 ways to grow your money for the ever-higher costs of higher education
How to start saving for your kids …read more
Source:: Business Insider