For parents and guardians planning for a child’s education, the Maryland 529 plan can be a powerful tool. Not only does it provide a way to save for college, but it also offers a valuable state tax deduction that can help families reduce their taxable income. Understanding the Maryland 529 tax deduction is essential for making the most of these benefits.
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses. Maryland offers two types of 529 plans: the Maryland College Investment Plan and the Maryland Prepaid College Trust.
Both plans are state-sponsored and designed to help families save efficiently for college, technical schools, and certain K-12 expenses.
One of the most attractive aspects of the Maryland 529 plan is the state income tax deduction. Contributions to a Maryland 529 plan are deductible from your Maryland state taxable income, meaning you pay less in state income taxes the year you contribute.
Maryland allows a deduction of up to $2,500 per beneficiary, per year, for individual filers, and up to $5,000 per beneficiary, per year, for married couples filing jointly. This means that if you contribute $2,500 to a Maryland 529 account for your child, you can reduce your Maryland taxable income by the same amount, potentially lowering your state income tax bill.
It’s important to note that there is no limit on how much you can contribute to the 529 plan overall, but the tax deduction is capped at the amounts mentioned above each year. Contributions above this amount can still grow tax-free and be used for qualified educational expenses, but they won’t provide additional immediate state tax deductions.
To fully maximize the benefits of a Maryland 529 plan, it’s important to understand what counts as a qualified educational expense. These include:
Using 529 funds for these qualified expenses ensures that withdrawals remain tax-free at both the state and federal levels. Withdrawals for non-qualified expenses may be subject to taxes and penalties.
The Maryland tax deduction is applied when filing your state income tax return. Here’s a step-by-step overview:
For example, if an individual contributes $2,500 to a Maryland 529 plan, their Maryland taxable income is reduced by $2,500. If they are in a 4.75% state income tax bracket, this could result in approximately $118.75 in state tax savings for that year. Married couples filing jointly can save double, up to the $5,000 deduction limit.
Maryland also allows taxpayers to carry forward unused deductions. If you contribute more than the annual deduction limit, the excess can be carried forward and applied in future tax years until fully utilized. This makes it easier for families to maximize the tax benefits even if they make large contributions in a single year.
Besides the state tax deduction, Maryland 529 plans offer additional benefits:
While the Maryland 529 tax deduction is beneficial, there are some considerations to keep in mind:
The Maryland 529 tax deduction is an excellent way for families to save for future education expenses while reducing their state tax burden. By contributing up to $2,500 per beneficiary for individuals, or $5,000 for married couples filing jointly, Maryland residents can enjoy immediate tax savings while benefiting from tax-free growth of their investments.
Coupled with the flexibility of qualified educational expenses, tax-free withdrawals, and estate planning advantages, Maryland’s 529 plans are among the most effective tools for college savings. Families planning for higher education should take advantage of these plans early to maximize both their investment growth and tax benefits.
Whether you are considering the Maryland College Investment Plan or the Maryland Prepaid College Trust, understanding the 529 tax deduction and how to claim it can provide substantial financial advantages for your family. By making strategic contributions each year, you can make college savings more manageable and reduce your state tax liability at the same time.
If you want to make sure you’re getting the full benefit of the Maryland 529 tax deduction — while staying aligned with your broader tax plan — Watter CPA can review your contributions, optimize your strategy and help you save more for your child’s education. Contact us today for 360-degree support.
Yes—Maryland 529 contributions can reduce your Maryland taxable income (up to $2,500 per beneficiary for single filers or $5,000 for joint filers), but they do not reduce your federal taxable income.
The main drawback is that if you use the money for non-qualified expenses, the earnings portion of the withdrawal is taxed and hit with a 10% federal penalty.
You report your Maryland 529 contributions as a subtraction on your Maryland state return using the designated 529 deduction section, up to the annual per-beneficiary limit (with any excess carried forward).
Yes, Maryland’s 529 plans are considered strong because they combine a state tax deduction, tax-free growth on qualified withdrawals, flexible investment options, and estate-planning benefits.
