Tax Deductions for Contributions to 529 College-Savings Plans

If I contribute $10,000 to a 529 college-savings plan this year, can I deduct it all on my state income tax return for 2015?

It depends on your state. Thirty-four states and the District of Columbia offer an income tax deduction for 529 contributions. Generally, you have to contribute to your own state’s plan, although Arizona, Kansas, Maine, Missouri and Pennsylvania let you deduct contributions to any state’s plan. Some states permit only the account owner to take the deduction. And each state has different rules about how much you can deduct in one year.

For example, Illinois and New York let you deduct up to $10,000 per year in contributions, or up to $20,000 if you’re a married couple filing jointly. Georgia lets you deduct up to $2,000 in contributions per beneficiary per year. In West Virginia, your contributions would be fully deductible, regardless of the amount. In Virginia, the account owner may deduct up to $4,000 in contributions per account per year, with unlimited carryforward of excess contributions; taxpayers age 70 or older may deduct the full amount in one year. Virginia is the rare state where contributions from a nonowner are deductible by the account owner.

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If your state has a low limit and no carryforward, you may want to spread your contributions over several years to make the most of the tax break. See www.savingforcollege.com for details about each state’s rules.

Can I contribute appreciated stock to a 529 to avoid paying capital-gains taxes?

That strategy may work for charitable giving, but unfortunately it doesn’t work for 529 plans. You may only contribute cash to a 529 account. So if you need to sell stock to come up with the cash, you’ll have to pay any capital-gains tax due on the profit. If, however, you have stocks that have lost money, you could come up with the cash and deduct your losses.