With the start of the new year, tax season looms, and tax deductions help ease your tax burden. Starting a 529 college savings plan is a smart investment because it provides an incentive to save for your child’s education, with the added benefit of tax deductions. We’ll break down what you need to know about 529 plans and tax advantages at the federal and state level.

529 Federal Tax Deductions

There is currently no federal tax deduction for contributions to a 529 plan. However, earnings on your 529 account are not subject to federal taxes as long as they are used for qualified education expenses, including tuition, room and board, textbooks, computers and software, lab fees and more.

If funds are invested in the 529 account early and have time to grow, the tax savings on earnings can be significant. If you invest $10,000 in a 529 account, for example, and it grows to $20,000 over the course of ten years, you will not pay federal taxes on the $10,000 in growth when you remove the funds from the account, as long as they are used for qualified expenses.

529 State Tax Deductions

There are over 30 states that offer a state tax deduction on contributions to a 529 plan. In most cases you must be a resident of that state and contribute to the state’s official 529 plan to qualify for the tax deduction. There are nine states that offer tax parity. This means that they will allow you to deduct contributions to any state’s 529 plan from your state income taxes. Tax parity states include:

• Arizona
• Arkansas
• Kansas
• Maine
• Minnesota
• Missouri
• Montana
• Ohio
• Pennsylvania

Additionally, there are 13 states that do not offer a state tax deduction on contributions to a 529 plan. These states include:

• Alaska
• California
• Florida
• Hawaii
• Kentucky
• Nevada
• New Hampshire
• North Carolina
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

You can see a full map of each state’s tax benefits and deductions here.

Most states have a cap on the total contributions you can deduct from your state taxes. In New York, for example, residents can deduct up to $5,000 in contributions to the New York state 529 plan.

Just four states allow you to deduct 100 percent of contributions to a 529 plan from your state taxes. New Mexico is one of these states. If you are a New Mexico resident, you can deduct 100 percent of your contributions to a 529 account with The Education Plan when the funds are used for qualified expenses. This offers a great tax incentive for New Mexico residents to save for higher education through the state’s 529 plan.

Who Can Take a 529 Tax Deduction?

You don’t have to be a child’s parent to benefit from the 529 tax deductions that are available.

Grandparents, aunts, uncles, and friends can all deduct contributions to a 529 plan from their state taxes in accordance with their state’s rules and regulations. If you are a New Mexico resident, for example, you can deduct 100 percent of contributions to your grandchild’s 529 account with The Education Plan from your state income taxes even if you are not the account holder.

The Bottom Line

A 529 college savings account provides attractive tax deductions for families seeking to save for future education. Select the plan that is best for your family, one with optimal tax deductions, maximum growth potential, and one that provides you with the motivation to save today so your children can succeed tomorrow.