Who Can Deduct 529 Contributions

We are looking to set up a 529 college-savings plan for our children. So if we, the parents, set up the account, can grandparents, family and friends receive a tax benefit as well when they contribute?

The tax-deduction rules vary a lot from state to state, says Joe Hurley of Savingforcollege.com.

Some states, such as Iowa and Missouri, only let the account owner take a deduction. Others, however, let non-account owners deduct their contributions. The state may list a specific group of people. Wisconsin, for example, allows a deduction of up to $3,000 per beneficiary per return, but only if the contributions are made for dependents, grandchildren, great-grandchildren, nieces or nephews (or for the account owner's own benefit).

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And a couple of states, such as Virginia, allow the account owner to claim a deduction for contributions made by other people. In fact, a non-owner can't take the deduction in Virginia. Account owners generally can deduct up to $2,000 in contributions each year, but the annual cap doesn't apply to account owners who are 70 or older. Virginia grandparents who want a big tax break, for example, should consider opening up a 529 for their grandkids themselves, even if the parents already have an account.

You generally must invest in your own state's plan to get a tax deduction, although residents of Kansas, Maine and Pennsylvania can get a tax break no matter where they invest. If out-of-state relatives want to deduct their contributions, they can open a plan themselves in their own state -- even if other relatives already have another plan for the child. And relatives in your own state may want to open their own 529s for your children if your state only permits account holders to take the deduction. A child can be the beneficiary of an unlimited number of plans.

The nuances of each state's rules are complicated, so it's essential to ask your state's plan about the specifics. See our State 529 Map for details about each state's plan and a list of our favorites, and check out Savingforcollege.com for more information about the plans.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.