Which states offer 529 plan tax breaks for K-12 savers?
Although the Tax Cuts and Jobs Act (TCJA) expanded the definition of a qualified higher education expense to include up to $10,000 per year in tuition expenses at private, public and religious elementary and secondary schools, not all states have conformed to the new law. In fact, some states consider K-12 tuition a non-qualified 529 plan expense. The earnings portion of a non-qualified 529 plan distributions may be subject to state income taxes and recapture of state income tax breaks attributable to the distribution.
However, residents of 21 states are eligible for an income tax deduction or credit for 529 plan contributions used to pay for college or K-12 tuition. The value of a 529 plan income tax benefit will vary depending on where you live and much you contribute. In Missouri, for example, married couples are eligible for a state income tax deduction for 529 plan contributions up to $16,000. That means a couple with $100,000 in taxable income who contributes $200 each month to a 529 plan can save $108 each year, whether they are paying for college tuition or K-12 tuition expenses.
States that offer a state income tax deduction or credit when 529 plans are used to pay for K-12
Annual 529 Plan Tax Benefit
Contributions to any state’s 529 plan up to $2,000 ($4,000 if married) are deductible
Contributions to 1.) an Arkansas 529 plan up to $5,000 ($10,000 if married) 2.) a non-Arkansas plan up to $3,000 ($6,000) and 3.) rollover contributions $7,500 ($15,000) are deductible
Contributions to a Connecticut 529 plan up to $5,000 ($10,000 if married) are deductible
District of Columbia
Contributions to a DC 529 plan up to $4,000 ($8,000 if married) are deductible
Contributions to a Georgia 529 plan up to $2,000 ($4,000 if married) are deductible
Contributions to an Idaho 529 plan up to $6,000 ($12,000 if married) are deductible
A 20% tax credit on up to $5,000 per year in contributions to an Indiana 529 plan can be claimed against Indiana income tax.
Contributions to an Iowa 529 plan up to $3,319 ($6,638 if married) are deductible
Contributions to any state’s 529 plan up to $3,000 ($6,000 if married) are deductible
Contributions to a Maryland 529 plan up to $2,500 ($5,000 if married) are deductible, with 10-year carryforward
Contributions to a Massachusetts 529 plan up to $1,000 ($2,000 if married) are deductible
Contributions to a Mississippi 529 plan up to $10,000 ($20,000 if married) are deductible
Contributions to any state’s 529 plan up to $8,000 ($16,000 if married) are deductible
Contributions to a North Dakota 529 plan up to $5,000 ($10,000 if married) are deductible
Contributions to an Ohio 529 plan up to $4,000 (any filing status) are deductible
Contributions to an Oklahoma 529 plan up to $10,000 ($20,000 if married) are deductible, with 5-year carryforward
Contributions to any state’s 529 plan up to the gift tax exclusion amount ($15,000 in 2018) are deductible.
Contributions to a Rhode Island 529 plan up to $500 ($1,000 if married) are deductible
Contributions to a South Carolina 529 plan are fully deductible
A 5% tax credit on up to $1,960 ($3,920 if married) per year in contributions to an Utah 529 plan can be claimed against Utah income tax.
Contributions to a Virginia 529 plan up to $4,000 (any filing status) are deductible, with an unlimited carryforward
Contributions to a West Virginia 529 plan are fully deductible.
Contributions to a Wisconsin 529 plan up to $3,200 (any filing status) are deductible, with an unlimited carryforward
Some states do not offer state income tax deductions or tax credits for K-12 tuition, but distributions for K-12 tuition are state-tax free. These include Delaware, Kentucky, New Hampshire, North Carolina and Tennessee. In addition, 529 plans in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming are eligible for K-12 distributions, but there is no state tax savings because there is no state income tax in these states.
What happens if your state is not on the list?
If your state has not yet conformed to the new tax law, you are still eligible to take federal tax-free withdrawals to pay for elementary or high school tuition. However, you may be subject to state income tax on the earnings portion, and any income tax deductions or credits claimed may be subject to recapture. California also imposes a 2.5% state penalty tax on the earnings portion of non-qualified withdrawals, which includes distributions used to pay for K-12 tuition.
Which 529 plans can be used to pay for K-12 tuition?
Any 529 savings plan can be used to pay for college or up to $10,000 per year in elementary and high school tuition, but some states offer savings options specifically designed for K-12.
- Louisiana’s START K12 program is a qualified tuition plan that allows Louisiana residents to save for tuition expenses at Louisiana K-12 schools. The START K12 program offers many of the same tax benefits as Louisiana’s START Saving Program, however contributions to a START K12 plan are not eligible for a state tax deduction.
- The Kentucky Education Savings Plan Trust (KESPT), available nationwide, will offer new 529 plan investment options that will better accommodate families saving for K-12. The new enrollment-based investment options will launch February 25, 2019.
Families who originally set up a 529 plan for college and have decided to use some of the funds for pre-college expenses may consider adjusting their investment strategy for a shorter time horizon. For example, with an age-based portfolio, investment allocations automatically shift over time based on the age of the beneficiary and when they will begin college. Most families select an option that is heavily weighted toward equities when the beneficiary is young and shifts toward more conservative fixed income options over time. Families also have the option to open a separate 529 plan to pay for a child’s K-12 tuition.