Can Massachusetts Residents Claim a 529 Tax Deduction?

Massachusetts residents often look for ways to maximize tax benefits, particularly when saving for education. A 529 plan provides an effective way to set aside funds for future educational expenses while potentially gaining state tax advantages.

Eligibility Requirements

To qualify for the Massachusetts 529 plan tax deduction, residents must be Massachusetts taxpayers filing a state income tax return. Contributions must go to the Massachusetts U.Fund College Investing Plan, managed by the Massachusetts Educational Financing Authority (MEFA). This plan offers investment options tailored to various risk levels and time horizons. The account owner, typically the contributor, is the one eligible to claim the deduction. For example, if a grandparent contributes, they must be the account owner to claim the deduction. The beneficiary does not need to reside in Massachusetts.

Qualified Education Costs

Qualified education costs include tuition, fees, books, supplies, and equipment required for enrollment at eligible institutions, such as colleges, universities, and vocational schools that participate in U.S. Department of Education programs. Room and board expenses are eligible if the student is enrolled at least half-time, with off-campus costs capped at the institution’s allowance for housing or the actual amount charged for institution-owned housing. The SECURE Act of 2019 expanded qualified expenses to include up to $10,000 in student loan repayments per beneficiary and costs for certain apprenticeship programs registered with the U.S. Department of Labor.

Deduction Limits

For the 2024 tax year, Massachusetts allows a deduction of up to $1,000 for single filers and $2,000 for married couples filing jointly for contributions to the Massachusetts U.Fund College Investing Plan. Contributions exceeding these limits do not carry over to future years, so careful planning is needed to maximize the deduction. Beyond the immediate tax benefit, consider the long-term growth potential of 529 plan investments, which can provide tax-free earnings when used for qualified education expenses.

Filing and Documentation

To claim the Massachusetts 529 plan tax deduction, taxpayers must maintain records of their contributions, such as receipts or confirmation statements from the Massachusetts U.Fund College Investing Plan. The deduction is claimed by filing Schedule Y with the state income tax return, where contributions must be accurately recorded to avoid errors or delays.

Non-Qualified Withdrawals

Using 529 plan funds for expenses outside qualified education costs results in financial penalties. The earnings portion of such withdrawals is subject to federal income tax and a 10% penalty, with potential state tax implications for Massachusetts residents. Exceptions to the penalty include situations where the beneficiary receives a scholarship, attends a U.S. military academy, or passes away, though earnings remain taxable. To avoid penalties, plan withdrawals carefully and keep records of how funds are used, such as tuition receipts or equipment invoices.

Federal Coordination

Massachusetts taxpayers must align their use of 529 plan funds with federal tax rules. While the state offers a deduction, the federal government provides tax-free growth of earnings and tax-free withdrawals for qualified expenses. Coordination with federal benefits like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) is essential, as taxpayers cannot use 529 funds for expenses claimed under these credits. Strategic planning is necessary to allocate expenses effectively.

Taxpayers should also be aware of the annual gift tax exclusion when contributing to a 529 plan. In 2023, individuals can contribute up to $17,000 per beneficiary ($34,000 for married couples) without triggering federal gift tax consequences. The IRS also allows a special five-year election, enabling contributors to “front-load” up to five years’ worth of gifts in a single year, which can be a powerful strategy for making substantial contributions while staying within gift tax limits.