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Published on: 10/04/2022 • 5 min read

Are 529 Contributions Tax Deductible?

Whether it’s nearing the end of tax season or you’re contemplating strategies for the year ahead, you may find yourself wondering, “Are 529 contributions tax deductible in Texas?” 

No matter where you live, 529 contributions are not deductible on the federal level, and in Texas specifically, contributions don’t qualify as state tax deductions either. 529 plans are tax-advantaged savings plans that help parents and family members save for education expenses. However, that doesn’t mean they aren’t worth adding to your college funding strategy.

Let’s take a deeper look into what states allow for deductions and explore some of the tax benefits you can receive by investing in a 529 College Savings Plan.

How much of my 529 is tax deductible?

The amount of money you’re able to deduct from your taxes will depend on the state in which you hold your 529 plan as well as your primary state of residence and the amount you contribute.

Federally, you are not able to deduct any amount of your contribution on your tax return — but this type of savings vehicle is still tax-favorable as contributions are able to grow tax-free and earnings do not face federal income tax when withdrawn for qualified expenses.

On the state level, in states that allow tax deductions or credits, you can claim contributions on your tax return per their laws. Check with your state to see what deductions apply to you.

Which states let you deduct 529 contributions?

As previously mentioned, 529 contributions are not deductible on federal tax returns. However, most states sponsor at least one 529 College Savings Plan and, depending on the state’s tax laws, may offer a full or partial tax deduction for contributions made to your plan. There are over 30 states that offer some variation of state tax breaks on contributions to any state’s plan, three that offer tax credits (Indiana, Utah, and Vermont), and seven states that don’t have a state tax and do not offer deductions on contributions.

So, does Texas have a state income tax? Does the state let you deduct 529 contributions? Texas does not have a state income tax and is one of the seven states that does not offer deductions on contributions. Therefore any tax benefits that come from investing in a Texas College Savings Plan or a Lonestar 529 Plan will come from investing in the account itself.

If you are thinking about incorporating a 529 College Savings Plan into your tax planning, you may want to consider contributing to another state’s 529 plan outside of the state you live in to make the most of your invested dollars. This high income tax savings strategy can come with other complexities, including intensive research, and because Texas does not have income tax, you’ll have to take other factors into account. That said, it’s best to consult with your wealth manager before making any big decisions.

Does Texas have a state 529 plan?

The state of Texas sponsors three different college savings plans: the Texas College Savings Plan (TCSP), the Lonestar 529 Plan (LS529), and the Texas Tuition Promise Fund (TTPF). All three options offer a tax-advantaged way to pay for education expenses; however, the first two options, TCSP and LS529, allow families to invest in portfolios whereas the TTPF lets families lock in rates and pay off future tuition starting today.

Keep in mind that these are not the only two 529 plans available to you as you can shop from out-of-state plans that may have lower fees.

What is the benefit of a 529 in Texas?

529 College Savings Plans are a low-maintenance way for high-net-worth families to benefit from tax benefits on both the federal and state level while funding their children’s higher education. Even without the added bonus of being able to receive state tax deductions, 529 College Savings Plans can be an invaluable part of financial planning in Houston.

Benefits of a 529 in Texas include:

  • Contributions are eligible for the annual gift tax exclusion of $15,000 ($30,000 for a couple giving jointly)
  • Earnings accumulate tax-free
  • Qualified withdrawals are federally tax-free
  • No annual contribution limits (however, contributions over $16,000 must be reported on IRS Form 709 and may affect your estate)

Contact Avidian Wealth Solutions for help with your high-net-worth college savings strategies!

So, are 529 contributions tax deductible? It depends on where you live. For Texans investing in a Texas College Savings Plan or a Lonestar 529 Plan, contributions are not deductible on their federal or state income tax returns, but that doesn’t mean they aren’t worth exploring as a savings vehicle for your children’s future education. Before you make any decisions, consult with a trustworthy financial advisor, like the ones at Avidian Wealth Solutions, who can help you consider how a 529 College Savings Plan can fit into your overarching savings and tax goals.

Avidian Wealth Solutions is a Houston-based boutique family office that offers high-net-worth families, individuals, and business owners a host of wealth management solutions including tax planning. As a fiduciary firm, it is our promise to you that your best interests will come first — always.

To learn more about whether investing in a 529 College Savings Plan is complementary to your financial plan, schedule a meeting with us today!

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