Tax Benefits of 529 Plans

Since the inception of 529 plans in 1996, many parents and grandparents have taken advantage of the opportunity to put away money for college and enjoy tax-free distributions. 

When opening a 529 plan, it is critical to understand what kind of tax benefit, if any, your home state offers.  Most states, including the District of Columbia, offer residents some kind of income-tax deduction for contributions to their 529 plans.  In the seven states with no income tax, there is no possibility of such a deduction.  Additionally, several states that collect income taxes offer no deduction for residents’ 529 plan contributions. 

While contributing to another state’s 529 plan will generally bring no tax deduction, some states offer a “tax parity.”  This means account owners get a deduction for 529 plan contributions to any state’s program. 

Grandparents should be aware of the estate planning benefits associated with 529 plan contributions.  Because older generations often have a higher net worth, college savings plans allow the wealthier taxpayers to take advantage of the gift-tax exclusion.  This refers to money that may be gifted from one person to another, on an annual basis, without incurring the federal gift tax. 

See Kate Stalter, The Tax Advantages of 529 Plans, U.S. News & World Report, Dec. 22, 2014.