Are 529 Contributions Tax Deductible in Wisconsin?
Learn how Wisconsin's tax rules apply to 529 plan contributions, including eligibility, deduction limits, and key considerations for residents.
Saving for education can be expensive, but 529 plans offer a tax-advantaged way to set money aside for future costs. These state-sponsored savings accounts provide tax-free growth and withdrawals when used for qualified expenses.
For Wisconsin residents, contributing to a 529 plan also offers state tax advantages. Understanding these benefits can help you make informed financial decisions.
State Tax Benefits
Wisconsin residents can deduct contributions to the state’s 529 plans, Edvest and Tomorrow’s Scholar, on their income tax returns. For 2024, the maximum deductible contribution is $5,000 per beneficiary for both single filers and married couples filing jointly. This deduction reduces taxable income, potentially lowering state tax liability.
Only contributions to Wisconsin-sponsored 529 plans qualify. Out-of-state plans are ineligible. Contributions must be made by December 31 to count for that tax year. Unlike federal tax benefits, which focus on tax-free investment growth and withdrawals, Wisconsin’s deduction provides an immediate tax reduction.
Excess contributions beyond the deductible limit cannot be carried forward. However, taxpayers can contribute to multiple beneficiaries to maximize deductions. For example, a parent with two children could contribute $5,000 to each child’s account and deduct $10,000.
Eligibility Criteria
To qualify for Wisconsin’s 529 plan tax deduction, the contributor must be a Wisconsin taxpayer and the account owner. Unlike some states that allow any contributor to claim a deduction, Wisconsin restricts this benefit to the account holder. Grandparents or other relatives cannot claim the deduction unless they open an account in their own name.
The beneficiary does not need to be a dependent of the account owner. This allows individuals to contribute toward the education of nieces, nephews, or non-relatives while still receiving the tax benefit.
Only contributions made with after-tax dollars qualify. Payroll deductions from pre-tax income and direct transfers from other tax-advantaged accounts, such as Coverdell Education Savings Accounts, do not provide additional tax benefits. Rollovers from another state’s 529 plan into a Wisconsin plan are also ineligible.
Contribution Limits
Wisconsin limits both tax benefits and overall account balances for 529 plans. While taxpayers can deduct up to $5,000 per beneficiary annually, total contributions per beneficiary are capped at $560,000. Once this limit is reached, no further contributions can be made, though investment earnings can continue to grow.
Annual contributions are also subject to federal gift tax rules. The IRS treats 529 contributions as gifts, meaning amounts exceeding the annual exclusion—$18,000 per donor, per beneficiary in 2024—may require a gift tax return (Form 709). Wisconsin does not impose a state-level gift tax, but federal rules still apply.
A special five-year election allows individuals to contribute up to $90,000 in a single year (or $180,000 for married couples) and treat it as if spread evenly over five years, helping avoid immediate tax implications while maximizing contributions.
Claiming the Deduction
Taxpayers claim the deduction for 529 plan contributions on Wisconsin Schedule CS, submitted with Form 1. Only contributions made during the tax year qualify, and the deduction must be reported accurately to avoid issues with the Wisconsin Department of Revenue.
Taxpayers should keep records such as bank statements, confirmation receipts from the 529 plan provider, and year-end contribution summaries. While these documents do not need to be submitted with the tax return, they may be required in case of an audit. Contributions made through payroll deduction should be verified against W-2 forms to confirm they were made with after-tax dollars.
Nonqualified Withdrawals
Wisconsin provides tax benefits for 529 plan contributions, but withdrawing funds for nonqualified expenses can result in penalties. Nonqualified withdrawals include distributions not used for eligible education costs, such as tuition, fees, books, and certain room and board expenses at accredited institutions.
At the federal level, earnings on nonqualified withdrawals are subject to income tax and a 10% penalty. Wisconsin also requires taxpayers to add back previously deducted contributions to taxable income if withdrawn for nonqualified expenses. Additionally, investment gains on nonqualified withdrawals are subject to state income tax.
To avoid penalties, account holders should ensure withdrawals align with qualified education expenses. If funds are no longer needed for the original beneficiary, options such as changing the beneficiary to another family member or rolling over funds to a different eligible education savings account can help preserve tax advantages. Proper documentation of expenses may be required to verify that withdrawals were used appropriately.
Residency Status
Wisconsin’s 529 plan tax benefits apply only to state residents. Nonresidents contributing to a Wisconsin 529 plan do not receive a state tax deduction, though they can still benefit from tax-free growth and withdrawals under federal law.
For individuals who move to or from Wisconsin, tax treatment depends on residency status during the contribution year. A taxpayer who contributes while a Wisconsin resident but later relocates can still claim the deduction for that tax year. However, those who move into Wisconsin cannot retroactively deduct contributions made while residing in another state.
Rollovers from another state’s 529 plan into a Wisconsin plan do not qualify for a new deduction under state tax rules.