Are 529 Contributions Tax Deductible in PA?

Saving for education can be costly, but 529 plans offer a tax-advantaged way to set aside money for tuition and other qualified expenses. These state-sponsored accounts allow tax-free growth and withdrawals when used for education.

Is It Deductible in Pennsylvania

Pennsylvania allows residents to deduct 529 plan contributions from their state taxable income. This applies to the Pennsylvania 529 Investment Plan (PA 529 IP), the Pennsylvania 529 Guaranteed Savings Plan (PA 529 GSP), and plans from other states. The deduction is capped at $17,000 per beneficiary for single filers and $34,000 for married couples filing jointly in 2024, matching the federal gift tax exclusion.

Unlike states that limit deductions to in-state plans, Pennsylvania permits deductions regardless of where the plan is held. A Pennsylvania resident contributing to a New York 529 plan, for example, can still claim the deduction. This flexibility allows individuals to choose a plan based on investment options rather than tax incentives.

Who Can Claim the Deduction

Anyone who contributes to a 529 plan can claim the deduction, including parents, grandparents, and other family members, even if they don’t own the account. Multiple contributors can each deduct their contributions, up to the allowable limits per beneficiary. If both parents and a grandparent contribute to a child’s 529 plan, each can deduct their respective contributions.

Businesses and trusts can also claim the deduction, which can be useful for business owners providing educational assistance to employees’ children or for estate planning strategies involving trusts.

Reporting on Tax Returns

529 contributions are reported as an adjustment to income on a Pennsylvania state tax return. Pennsylvania follows a gross income tax system, meaning deductions lower taxable income rather than providing a direct credit. The deduction is listed on PA-40, the state’s personal income tax return, under allowable adjustments.

Taxpayers should keep records such as bank statements and contribution confirmations in case of an audit. The Pennsylvania Department of Revenue does not require additional forms to claim the deduction, but documentation may be requested. Contributions must be processed by December 31 to count for that tax year.

Penalties for Misreporting

Overstating a 529 contribution deduction can result in penalties, interest, and audits by the Pennsylvania Department of Revenue. If a deduction is disallowed, the taxpayer must pay the additional tax owed, plus interest. For 2024, the interest rate on underpayments is 8% per year, compounded daily.

Pennsylvania imposes a 5% penalty per month on unpaid tax balances, up to 25%. If fraud is suspected, additional civil penalties may apply, and in severe cases, criminal charges could be pursued under Pennsylvania tax law. Fraudulent misreporting could lead to fines or imprisonment.