Are 529 Contributions Tax Deductible in Minnesota?

529 college savings plans offer a tax-advantaged approach to saving for higher education. Investments grow tax-deferred, and withdrawals for qualified higher education expenses are typically tax-free at the federal level. Many states also provide additional tax incentives. This article explores the specific tax benefits and considerations for Minnesota residents utilizing 529 plans.

Minnesota State Tax Deduction for 529 Contributions

Minnesota offers residents a choice between two state tax benefits for contributions to any state’s 529 college savings plan: a nonrefundable income tax credit or an income tax subtraction. Taxpayers cannot claim both for annual contributions. This flexibility allows individuals to select the benefit that best suits their financial situation.

For those opting for the income tax subtraction, Minnesota permits a deduction of up to $1,500 for single filers and $3,000 for married taxpayers filing jointly. This subtraction applies to net contributions, meaning any distributions taken from the account during the year reduce the eligible amount. Amounts rolled over from other 529 plans are not considered eligible contributions.

Alternatively, taxpayers can claim a nonrefundable credit equal to 50% of their contributions, up to a maximum of $500. This credit reduces a taxpayer’s Minnesota income tax liability but is subject to income limitations.

The credit begins to phase out for taxpayers with a Minnesota Adjusted Gross Income (AGI) exceeding $93,610. For unmarried filers, the credit phases down from $500 to $250 within an AGI range of $93,610 to $121,610, and is entirely phased out for AGIs above $168,500. For married taxpayers filing jointly, the credit phases down from $500 to $0 within an AGI range of $93,610 to $193,500. To be eligible for either the subtraction or the credit, the contributor must be a Minnesota resident and not claimed as a dependent on another individual’s tax return. The individual claiming the benefit does not need to be the account owner of the 529 plan. Minnesota does not provide for a carryover of unused deduction or credit amounts for contributions exceeding the annual limits.

Claiming the Minnesota Deduction

Reporting 529 plan contributions for Minnesota state tax purposes involves specific forms. Schedule M1529 is the primary form used to calculate the education savings account contribution credit or subtraction. This schedule helps taxpayers determine the eligible amount based on their contributions and income.

After completing Schedule M1529, transfer the calculated subtraction or credit amount to Form M1, the Minnesota Individual Income Tax Return. Taxpayers should accurately report these amounts in the designated sections of Form M1. Although not typically submitted with the tax return, retain all statements and records from your 529 plan administrator documenting contributions.

These records serve as supporting documentation if the Minnesota Department of Revenue requests verification. The Minnesota state tax return, including Form M1 and any applicable schedules like M1529, can be filed electronically or by mail.

Minnesota Tax Treatment of 529 Withdrawals

The tax implications of 529 plan withdrawals in Minnesota depend on whether they are “qualified” or “non-qualified.” Qualified withdrawals, used for eligible higher education expenses, are exempt from both federal and Minnesota income taxes. This tax-free treatment applies to both the principal and earnings portions of the withdrawal.

Minnesota generally aligns with federal guidelines for qualified higher education expenses. These include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Room and board costs, and expenses for apprenticeship programs, are also qualified. Funds used to repay up to $10,000 (lifetime limit per individual) in principal or interest on student loans for the beneficiary or their sibling also qualify.

Minnesota’s tax law differs regarding K-12 tuition expenses. While federal law permits up to $10,000 annually from 529 plans for K-12 tuition, Minnesota has not adopted this provision. If 529 funds are used for K-12 tuition, the earnings portion of that withdrawal is subject to Minnesota income tax. Any prior Minnesota deductions or credits claimed on contributions used for K-12 tuition are also subject to recapture.

Non-qualified withdrawals, not used for eligible higher education expenses, face different tax consequences. The earnings portion is subject to Minnesota income tax at the taxpayer’s ordinary income rate. A 10% federal penalty tax on the earnings also applies. If a Minnesota tax deduction or credit was previously claimed for contributions now withdrawn for non-qualified purposes, Minnesota imposes a recapture tax on those amounts. This recapture tax is reported on Schedule M1529 and added to Form M1.

Funds can be moved between accounts without adverse tax consequences in certain situations. Rollovers from one 529 plan to another for the same beneficiary are generally tax-free in Minnesota, mirroring federal treatment. Funds can also be rolled over tax-free from a 529 plan to an ABLE (Achieving a Better Life Experience) account for the same beneficiary or a family member, subject to ABLE account annual contribution limits, though recapture of prior Minnesota deductions or credits may still apply. As of January 1, 2024, rollovers from 529 plans to Roth IRAs are federally tax-free under specific conditions, and Minnesota generally follows this, but prior deductions or credits may be subject to recapture.