Many states give the account owner a full or partial state income tax deductions for their contributions to the state's section 529 plans.

Contributions to other states' section 529 plans are generally not deductible in your home state. See the discussion of "tax parity" below.

Contributions may be tax deductible on even a short-term basis, leading to a state income tax loophole.

Deductibility of State 529 Plan Contributions

The following table shows the limits, if any, on state income tax deductions for section 529 plan contributions. If there is a limit on the amount of the deduction, many states allow carry forward of excess contributions to future income tax returns.

State	529 Deduction
Alabama	--
Alaska	No state income tax
Arkansas	$5,000 per parent ($10,000 joint)
Arizona	$750 single/$1,500 joint (any state plan)
California	--
Colorado	Full amount of contribution
Connecticut	$5,000 per parent ($10,000 joint)
Delaware	--
Florida	No state income tax
Georgia	$2,000 per beneficiary
Hawaii	--
Idaho	$4,000 single/$8,000 joint
Illinois	Full amount of contribution (savings plan only)
Indiana	20% tax credit up to $1,000
Iowa	$2,180 single/$4,360 joint per account
Kansas	$3,000 single/$6,000 joint per beneficiary (any state plan)
Kentucky	--
Louisiana	$2,400 per beneficiary
Maine	$250 per beneficiary starting 2007 (any state plan)
Maryland	$2,500 per account, 10 year carryforward
Massachusetts	--
Michigan	$5,000 single/$10,000 joint
Minnesota	--
Mississippi	$10,000 single/$20,000 joint
Missouri	$8,000 single/$16,000 joint
Montana	$3,000 single/$6,000 joint
Nebraska	$1,000 per tax return
Nevada	No state income tax
New Hampshire	--
New Jersey	--
New Mexico	Full amount of contribution
New York	$5,000 single/$10,000 joint
North Carolina	$2,000 single/$4,000 joint
North Dakota	--
Ohio	$2,000 per beneficiary per contributor or married couple with unlimited carryforward
Oklahoma	$2,500 per beneficiary per contributor
Oregon	$2,000 per year
Pennsylvania	$12,000 per contributor per child (any state plan)
Rhode Island	$500 single/$1,000 joint, with carryforward
South Carolina	Full amount of contribution
South Dakota	No state income tax
Tennessee	--
Texas	No state income tax
Utah	Either a deduction ($1,620 single/$3,240 jointly) or tax credit ($87 single/$173 joint)
Vermont	10% tax credit up to $250 per taxpayer per beneficiary
Virginia	$2,000 per account per year (no limit age 70 and older)
Washington, DC	$3,000 single/$6,000 joint
Washington	No state income tax
West Virginia	Full amount of contribution
Wisconsin	$3,000 per dependent beneficiary, self, or grandchild
Wyoming	No state income tax

Tax Parity

Only Pennsylvania, Arizona, Maine and Kansas provide for state tax parity, where contributions to any state plan are eligible for the state's income tax deduction. An Illinois class action lawsuit, Maryam Ahmad v. Illinois Department of Revenue (filed May 15, 2007), challenges the constitutionality of the Illinois tax break which does not provide for tax parity. A related case concerning municipal bonds, Davis v. Department of Revenue of Kentucky, ruled that state statutes that do not provide for tax parity (i.e., that limit state income tax deductions to in-state bonds) are unconstitutional in 2006 by the Kentucky appellate court (and was let stand by the Kentucky Supreme Court). At issue was the commerce clause of the US Constitution, which reserves to Congress the right to regulate interstate commerce. However, the US Supreme Court reversed the decision and remanded the case to the lower court on May 19, 2008, finding that "Kentucky's differential tax scheme does not offend the Commerce Clause" (No. 06-666, argued November 5, 2007). The ruling is not surprising because the US Supreme Court previously declined to hear an appeal of an Ohio case, Shaper v. Tracy, which affirmed the state's right to discriminate against other states' muncipal bonds. The US Supreme Court ruling might or might not affect the Illinois lawsuit, in part because there are four states that are providing for tax parity, in part because the single-state plan vs national plan argument is weaker with regard to 529 plans, and in part because 529 college savings plans are established to encourage families to save for college and not as a way of funding public projects.

State Income Tax Loophole

While 529 college savings plans are intended to encourage long-term savings, the ability to deduct current contributions creates a loophole that encourages short-term savings. In some states a parent could contribute the current year's college costs to the state's 529 college savings plan in order to qualify for the income tax deduction, and then withdraw the funds a day later to pay the bursar's bill. So long as the distribution is taken to pay for qualified higher education expenses, the parent qualifies for the state income tax deduction. Most states do not have a waiting period on withdrawals. Some states have a one-year waiting period on withdrawals.