Can You Claim a CHET Tax Deduction for Your Contributions?

Saving for education through a CHET (Connecticut Higher Education Trust) 529 plan offers tax advantages, but many wonder if contributions qualify for a deduction. Since tax benefits vary by state and federal rules, understanding how CHET fits into your tax filing is essential.

This article explains whether you can claim a CHET tax deduction, what qualifies as an eligible contribution, and the steps to include it in your state return.

Account Holder Eligibility

In Connecticut, any U.S. citizen or resident alien with a valid Social Security number or Taxpayer Identification Number can open a CHET account. There are no income restrictions, so anyone can contribute regardless of earnings. However, only the account owner controls the funds, including investment decisions and beneficiary changes.

Parents and guardians commonly open CHET accounts for their children, but account holders are not limited to immediate family. Grandparents, aunts, uncles, and even non-relatives can establish accounts for a designated beneficiary. A single individual may also open multiple accounts for different beneficiaries, though contribution limits apply per beneficiary rather than per account.

Connecticut does not offer a state tax deduction for CHET contributions, nor does the federal government. However, the plan provides tax-free growth and tax-free withdrawals when used for qualified education expenses. Understanding how contributions and withdrawals affect tax planning is essential, especially for those managing multiple education savings accounts.

Qualified Contribution Criteria

CHET contributions must be made in cash—via checks, electronic transfers, payroll deductions, or wire transfers. Non-cash assets, such as stocks or bonds, cannot be directly contributed but can be sold and the proceeds deposited into the account. A contribution is considered complete once CHET receives and processes the funds.

While CHET does not impose annual contribution limits, federal gift tax rules apply. In 2024, individuals can contribute up to $18,000 per beneficiary without triggering gift tax reporting. A special five-year election allows contributors to front-load up to $90,000 at once, treating it as if spread over five years for tax purposes. This strategy can help maximize education savings while managing estate planning.

Withdrawals must be used for qualified educational expenses to remain tax-free. These include tuition, fees, books, and certain room and board costs at eligible institutions. Up to $10,000 per year can be used for K-12 tuition, and student loan repayments are allowed up to a lifetime limit of $10,000 per beneficiary. Withdrawals for non-qualified expenses may result in taxes and penalties.

State Filing Steps

Although Connecticut does not offer a state tax deduction for CHET contributions, maintaining accurate records is important for financial planning and potential audits.

Gathering Contribution Records

Detailed records of all CHET contributions help with financial tracking and future reporting. Account holders should retain bank statements, transaction confirmations, and CHET account statements showing the date, amount, and source of each deposit. CHET provides annual account summaries consolidating contribution records.

For those making recurring contributions through payroll deductions or automatic transfers, verifying that all scheduled deposits were processed correctly is important. If multiple individuals contribute, such as grandparents or other relatives, tracking who contributed and when can assist with gift tax reporting and estate planning.

Completing the Relevant Schedule

Connecticut does not require a specific tax form for CHET contributions, but taxpayers should ensure their filings accurately reflect any relevant financial activity. If withdrawals were made for qualified education expenses, they may need to be reported on federal tax forms, which could indirectly affect state filings.

If a CHET account was funded using proceeds from another 529 plan through a rollover, taxpayers should confirm the transaction was completed within the 60-day window to avoid tax consequences.

Retaining Documentation

Keeping CHET contribution and withdrawal records for at least three to five years is advisable, as tax authorities may request documentation during an audit. Digital copies of account statements, contribution confirmations, and withdrawal records should be stored securely.

For estate planning, individuals making large contributions under the five-year gift tax election should document the election on IRS Form 709, even though Connecticut does not impose a state gift tax. If a CHET account is transferred to a new beneficiary, records of the original contributions and any tax elections should be preserved to ensure compliance with IRS regulations. Proper documentation can also assist with financial aid applications, as some colleges request verification of 529 plan balances and contributions when determining need-based aid eligibility.

Coordination with Federal Filings

Federal tax treatment of CHET accounts focuses on tax-free investment growth and tax-exempt withdrawals for qualified expenses. While contributions do not reduce taxable income, proper reporting ensures compliance with IRS regulations, particularly for distributions.

Form 1099-Q, issued by CHET, details withdrawals and must be reviewed to distinguish between qualified and non-qualified distributions. If funds are used for non-educational purposes, the earnings portion of the withdrawal is subject to federal income tax and a 10% penalty unless an exception applies, such as the beneficiary receiving a scholarship.

Taxpayers using CHET funds for education expenses should ensure withdrawals align with eligible costs under IRS Publication 970 to avoid tax liabilities. If a student receives tax-free scholarships, coordinating CHET withdrawals accordingly helps prevent taxable income. Those claiming the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC) must balance these education benefits with 529 plan distributions, as the IRS prohibits using the same expense for both a tax-free withdrawal and an education credit.