529s Are Not Tax Deductible at the Federal Level, But May Be at the State Level

Here's a question that caught my eye the other day. It's from a Kiplinger's reader who wants to know if a 529 college savings contribution is tax deductible. It caught my eye because the question was from a man in Michigan, the same state I live in. Here's his question:

If I put money into a Michigan 529 for our granddaughter's college, is that a tax write-off, and if you gift money to your children, is that also a tax deduction?

Now I already knew the answer since I recently opened up two Michigan 529s, but I wanted to see how Kiplinger's would respond. Their thoughts:

There is no federal tax deduction for contributions to 529 college savings plans (Uncle Sam's contribution is that earnings can be withdrawn tax free when used for qualifying college expenses). But the state of Michigan does allow state residents to deduct on state returns up to $5,000 ($10,000 on joint returns) of contributions to the Michigan 529 plan.

Yep. Right answer.

For us, this means that our 2006 contributions will save us almost $400. Not bad for doing something we'd do anyway.

But...

I really wish 529 contributions were federally tax deductible. That would be REALLY great now, wouldn't it? ;-)

As far as tax deductibility at the state level goes, it can make a big difference in whether or not you should invest in your state's program or a 529 plan from another state. My best advice is that before you do anything, compare the pros and cons of various plans at Saving for College. That's what I did and the site was very useful in helping me think through all the issues of picking the best 529 plan for my family.

Comments

[T Struck]

For the Michigan 529 Plan that's a pretty great deal with no income limitations for tax deductability.

Of course, if you live in Michigan ... just move to Kalimazoo and your college is paid for.
http://www.kalamazoopublicschools.com/education/dept/dept.php?sectiondetailid=10657

Tim

[Truman S.]

I just moved from NY State to CT. My 529 is in NY, does that mean I have to move my 529 to CT to realize the deduction?

[IANAA (I am not an accountant)]

Aren't most education expenses somehow tax deductible or at least tax advantaged (Think hope scholarship and life time learning credit)

If 529 expenses were also tax deductible, then you'd be deducting twice for the same money.

[FMF]

Truman --

If your deduction was a state tax deduction given by NY because you had a 529 in NY, then you won't get it in CT. I'm not sure whether or not CT offers such a benefit. You can find out at Saving for College.

[FMF]

IANAA --

While there are certainly tax benefits to several college savings/paying opportunities, there are limits on these that usually fall well short of the total cost of funding a college education.