A 529 plan is a popular savings vehicle for education expenses, but many people wonder if contributing to one can reduce their taxable income. The answer depends on whether you are looking at federal taxes or state taxes, as the rules differ.
At the federal level, contributions to a 529 plan do not reduce your federal taxable income. This means that money you put into a 529 account is made with after-tax dollars, and you cannot claim a federal tax deduction for these contributions.
However, the money in a 529 plan grows tax-free, and withdrawals used for qualified education expenses are also federal income tax-free. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs at eligible colleges, universities, and vocational schools. Some states also allow 529 funds to be used for K-12 tuition, up to $10,000 per year per student.
So while contributions do not lower your federal taxable income, the tax-free growth and withdrawals make 529 plans an effective long-term education savings strategy.
State tax rules are more generous. Many states, including Maryland, offer a state income tax deduction or credit for contributions to their 529 plans. For example:
These state tax deductions do reduce your taxable income at the state level, meaning you could pay less in state income taxes the year you contribute. Contributions above the state deduction limit may still grow tax-free and be used for qualified education expenses, but they will not provide an additional immediate tax deduction.
In short, a 529 plan does not reduce your federal taxable income, but it can lower your state taxable income if your state offers a deduction or credit. Even without a federal deduction, 529 plans remain one of the most tax-efficient ways to save for college because earnings grow tax-free, and withdrawals for qualified expenses are tax-free.
For families planning for education, contributing to a 529 plan offers a combination of tax benefits and long-term savings growth, making it a smart choice for both parents and students.
If you’re unsure how 529 contributions affect your federal and Maryland state taxes — Watter CPA can review your situation & help you maximize any available deductions and build a smart education savings strategy for your family. Reach out to our dedicated team today for decades of expertise.
