Are 529 Contributions Tax Deductible in Texas?

529 plans offer a way to save for future education costs, providing various tax benefits that can make them attractive savings vehicles. Many inquire about the tax deductibility of contributions to these plans, particularly at the state level. Understanding how these plans interact with state tax laws, like those in Texas, is important for effective financial planning. This article clarifies the tax treatment of 529 plan contributions for residents of Texas.

Texas State Tax and 529 Contributions

Contributions to 529 plans are not deductible on your federal income tax return. You cannot reduce your taxable income by the amount deposited into a 529 plan when filing your annual federal tax return.

Texans do not receive a state-level deduction for 529 plan contributions. This is because Texas is one of the states that does not impose a state income tax on individuals. Some other states, which do have state income taxes, may offer a deduction or tax credit for contributions, often to their own state-sponsored 529 plans.

Understanding 529 Plan Tax Advantages

While contributions to 529 plans are not deductible, these accounts offer significant tax advantages once funds are invested. The earnings within a 529 plan grow tax-free, meaning you do not pay federal income tax on the investment gains each year. This tax-free growth is a substantial benefit, allowing your savings to compound.

Withdrawals from a 529 plan are also tax-free, provided the funds are used for qualified education expenses. These expenses include tuition, fees, books, supplies, equipment, and even room and board for students enrolled at least half-time. The tax-free nature of qualified withdrawals, as outlined in Internal Revenue Code Section 529, makes these plans a powerful tool for educational funding.

Furthermore, 529 plans offer gift tax benefits. Contributions are considered completed gifts to the beneficiary and qualify for the annual gift tax exclusion, which is $19,000 per donor per beneficiary in 2025. Donors can also elect to contribute up to five years’ worth of annual exclusions at once, allowing a single contribution of up to $95,000 per beneficiary in 2025 without triggering gift tax, provided no other gifts are made to that beneficiary during the five-year period.

Texas 529 Program Options

Texas residents have access to two primary 529 programs: the Texas Tuition Promise Fund and the Texas College Savings Plan. The Texas Tuition Promise Fund is a prepaid tuition plan, allowing families to lock in current tuition rates for future college enrollment at eligible Texas public colleges and universities. This plan is designed to protect against rising tuition costs by purchasing tuition units.

The Texas College Savings Plan, conversely, is an investment-based plan that operates more like a traditional brokerage account. Contributions are invested in various portfolios, such as age-based or static portfolios, and the value of the account fluctuates with the market performance of these investments. Both programs provide Texans with options to save for higher education, each with distinct features regarding how funds are saved and grown.