Contributions to a 529 plan do not qualify for a tax deduction at the federal level. Contributors at the federal level should be aware that their gifts may be taxable under federal gift tax regulations, and they should bear this in mind while making their contributions. The amount of money that may be given to another person without incurring gift taxes will increase to $16,000 in the tax year 2022, from $15,000 in the tax year 2021, and to $32,000 for married couples who combine their gifts.

At the state level, most states provide residents with a deduction, while just a few states provide residents with a credit. In most cases, deductions will only be significant if they enable the donor to deduct more money than the normal amount allowed by the state. Credits provide the greatest benefit since the amount of tax that a taxpayer is obligated to pay is reduced when the credit is applied.

529 Tax Advantages Offered

Contributions made by taxpayers to any 529 plan in the United States are eligible for a state tax benefit in over 30 states participating in a tax parity program. There are tax credits available in these three states. States with tax credits and parity put themselves in an evident position to compete for the most favorable advantages.

Tax Parity Deductions

Arizona and Kansas are the only states that will provide tax deductions to citizens in the 2021 tax year for contributions made to any state's 529 plan, not simply those made to the individuals' own state's plan. Residents of these states can now pick and choose among the state plans available, searching for those with the lowest costs and the greatest investment alternatives while still maintaining their eligibility for a state tax deduction.

Tax Credits

Indiana

A tax credit of up to $1,000 may be claimed by every contributor who gives up to $5,000. The credit is equal to 20% of the amount contributed.

Utah

Contributions made up to $2,040 (for individuals) or $4,080 (for married couples filing jointly) are eligible for a tax credit of up to 5% per beneficiary, with a maximum credit of $102 (for individuals) or $204 (for married couples filing jointly).

Vermont

A 10% tax credit may be claimed by the donor for each beneficiary on donations of up to $2,500 (for those filing as individuals) or $5,000 (for those filing jointly), with a maximum credit of either $250 (for individuals) or $500 (for those filing jointly) per contributor.

Other States That Offer Deductions

You are only permitted to deduct money donated to a state plan that offers deductions if you live in one of the remaining states that offer tax savings. Because of this, the states that provide the greatest number of tax deductions will be seen as the most desirable from an economic standpoint.

Although most states impose dollar restrictions on 529 deductions, Colorado, South Carolina, New Mexico, and West Virginia all let you deduct the entire amount of donations to their respective 529 plans. However, Colorado restricts the amount a person may deduct by comparing it to their total taxable income.

States with No Tax Savings

In certain states, contributions to a 529 plan are not eligible for a tax deduction or credit. If you live in one of these states, you may still choose from a wide variety of 529 plans, but there are no longer any tax benefits associated with using them. If you reside in one of these states, your best choice is to choose a state plan with reasonable costs and the opportunity to make the kinds of investments you want. You do not need to be a resident of a state to invest in that state's plan in the vast majority of instances.

Which State Plan Should I Go With?

Tax credits and deductions are wonderful, but if the costs associated with your state's 529 plan are too expensive, their benefits may not add up to much. Be careful to investigate the costs associated with the plan offered by your state. Shop around and evaluate the costs in light of what they are in other states. The performance of the investments and the availability of investment choices inside a plan, such as target-date funds, are other significant aspects to consider.

Is There Anything That Might Go Wrong If You Used A 529 Plan?

There is always the possibility of loss associated with any investment. Because 529 plans may be organized in several different ways, you can reduce the likelihood of losing any portion of your original investment by selecting an option compatible with your current financial standing and the trajectory of your child's academic career. If you utilize the profits for anything other than qualifying higher education costs, they will be subject to federal taxes, and you will have to pay those taxes.