Smart College Savings

States Give Tax Breaks To College Savers

Tax breaks from some states make college savings options like 529 plans more attractive. (It also makes college planning more complicated, though.)

Giving another boost to 529 college-savings plans, a growing number of states are allowing their residents to take state-tax deductions for contributions they make to other states' 529 plans.
Pennsylvania, Maine and Kansas have approved such tax breaks, and a handful of other states are considering similar measures. Previously, these states offered either no tax deduction or a deduction only if a resident contributed to the state's own 529 plan.

The states' move toward tax parity for all 529 contributions is likely to make it simpler and more appealing for residents to save for their children's college educations. A new law that makes permanent the 529s' federal tax benefits has also helped spark more interest in these plans.

The 529 plans — named for a section of the federal tax code — have gained popularity by allowing parents and grandparents to put away money for college and pay no federal tax on withdrawals if the money goes for tuition and books. In many cases, the money can be used for any college or university, not just a school in the state that sponsors the 529.

More than half of states provide deductions — generally ranging from $2,000 to $12,000 — on state income-tax returns for 529 contributions.