529 Plan Tax Benefits
Save on your taxes and save for college. It’s a win-win.
Tax savings are among the biggest benefits of a 529 plan with the Education Plan. We break down the benefits here so you know exactly what to expect.
529 Federal Tax Benefits
Earnings on your 529 account and withdrawals from it are not subject to federal taxes when used for qualified educational expenses. This means that you will pay no federal income taxes as your account grows over the years and no federal income taxes when your beneficiary removes funds to use for qualified higher education expenses, including tuition, room and board, books and much more.
529 State Tax Benefits
New Mexico Residents
In addition to the federal tax benefits, 100% of contributions to your 529 account with The Education Plan are deductible from your New Mexico state taxable income each year. New Mexico is one of only four states in the nation to provide an unlimited state tax deduction for contributions to its 529 plan. (The Education Plan is New Mexico’s official 529 plan. Contributions to other states’ 529 plans are not tax deductible).
If you are a New Mexico resident, earnings on your 529 account and withdrawals from it are not subject to state taxes when used for qualified educational expenses.*
*Due to the passage of HB 342, which will be effective June 16, 2023, New Mexico will be in alignment with Section 529 of the IRC allowed uses. Until that time, New Mexico does not permit state tax deductions for contributions used to pay for K-12 tuition payments and transfers to an ABLE account. It likely will not allow deductions for contributions used to pay for student loan repayments and apprenticeship programs. The amounts deducted for these purposes may be recaptured as state taxable income in subsequent years. Click here for more information.
Non-New Mexico Residents
If you are not a resident of New Mexico, you will still receive the federal tax benefits outlined above. Some states have tax benefits for contributions to an out-of-state 529 plan. The map below can help you determine your state’s tax benefits and which plan is right for your family. Before investing, we recommend consulting a tax advisor to determine your state’s tax benefits and if it imposes any limitations on the use of 529 contributions.
Understanding the 529 Tax Landscape State by State
Get the most out of your state tax benefits.
Home of The Education Plan
These states offer tax deductions or credit for contributions to any 529 plan, regardless of state.
*Please Note: State tax benefits in tax parity states apply to contributions in any 529 plan.
These states do not offer tax deductions or credit for 529 contributions, or have no state income tax.
In-state tax benefit
These states offer tax deductions or credit for contributions to the
in-state 529 plan only.
A contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary. The first $17,000 ($34,000 for a married couple filing jointly) given to each beneficiary each year is excluded from federal gift taxes. (Other gifts given to the same beneficiary must also be taken into account when calculating the total gift in a given year.)
A special provision in the IRS code allows you to use five-year gift tax averaging when contributing to a 529 plan. This means you can contribute up to $85,000 (or $170,000 for a married couple) to a 529 account in a single year and choose to have it treated as if you had given it over a five-year period for tax purposes. This can be a helpful way to jump-start a 529 account early on without incurring federal gift taxes.
For additional information about potential gift tax consequences, please refer to the Plan Description. We recommend consulting with a tax advisor about gift taxes and your specific situation before investing.
Using Your Tax Refund to Fund Your 529 Account
Reinvesting your annual tax refund into your 529 account is a simple and effective way to grow your account every year. While it can be tempting to spend a refund on a single indulgent purpose, putting it into a 529 account will put it to work for you and pay dividends a purchase never will.