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Mastering College Savings: Making the Most of 529 Deduction State Incentives

Mastering College Savings: Making the Most of 529 Deduction State Incentives

| August 16, 2023

If you’re looking for opportunities to grow your child’s college savings, the 529 plan, and the tax deduction it provides, might be right for you. This deduction is one way to raise funds for your child’s tuition, books, and other qualified education expenses. It’s the ultimate solution to ease the burden of paying for college.

What is a 529 Deduction?

A 529 tax deduction is a state-level incentive offered to residents who contribute to a 529 college savings plan. It allows individuals to deduct a certain amount of their contributions from their state income taxes, reducing their taxable income. This benefit helps students and their families by providing an extra financial incentive to save for higher education expenses.

Each state has its own rules and incentives related to 529 plans. These state-specific prerequisites encourage residents to save for education expenses using their state's 529 deductions. Explore the 529 plans in your state to maximize the potential advantages and savings opportunities available.

State-Specific 529 Plan Rules

States fall under four categories based upon the rules and benefits they provide. Each group offers unique advantages to individuals and families saving for college education. It’s worth noting that each state has their own set of prerequisites and benefits despite belonging to a particular category.

In-State Tax Benefits

Many states provide tax benefits through income tax deductions or credits for contributions to 529 plans. With tax deductions, residents can deduct their 529 plan contributions from their state-taxable income, lowering their overall state taxes. For example, a $5,000 contribution to a 529 plan in a 5% state tax bracket would save you $250 in state taxes. These tax credits directly reduce the state income tax owed. A $5,000 contribution with a $2,000 tax credit would save $2,000 in state taxes.

In-state tax benefits are available in Oregon, Idaho, Utah, Colorado, New Mexico, Oklahoma, Nebraska, North Dakota, Iowa, Louisiana, Mississippi, Alabama, Georgia, South Carolina, Virginia, Ohio, West Virginia, Wisconsin, Illinois, Indiana, Michigan, New York, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, and the District of Columbia.

The benefit varies from state to state. Some states offer up to $10,000 annually in deductions, while others provide smaller tax breaks or credits.

Tax Parity States

The concept of tax parity is to offer equal tax advantages and flexibility, thus encouraging college savings. Montana, Arizona, Kansas, Missouri, Minnesota, Arkansas, Pennsylvania, and Maine are tax parity or conformity states. They grant tax deductions for all 529 plans, even those from other states, making this category the most appealing option. This means, for example, that someone from Montana could contribute to a New York plan.

Tax Neutral States

Alaska, California, Nevada, Washington, Wyoming, Texas, Hawaii, South Dakota, Tennessee, Kentucky, North Carolina, Florida, and New Hampshire are tax-neutral or nonconformity states. These states don’t offer specific state income tax deductions or credits for contributions in their 529 college savings plans or other state plans. Residents in these states receive no special tax benefits related to their 529 plan contributions, and the tax treatment is neutral, similar to any other investment.

Nevertheless, withdrawals for qualified education expenses are always state and federally tax-exempt.

Due Diligence is Necessary

It’s crucial to explore the offerings provided by your home state and take full advantage of the potential benefits and savings opportunities. Each state's 529 program have unique features, investment options, and tax incentives that you’re able to leverage.

By understanding your state's plan, you’ll be able to make informed decisions that align with your financial goals and optimize your college savings strategy.


Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters. CRN202507-4880661