Delaware 529 Plan Tax Deduction: What You Need to Know
Understand how contributions to Delaware's official 529 plan can lower your state tax liability and the key rules that govern your deduction.
A 529 plan is a savings account designed to encourage saving for future education costs. While contributions are not deductible on federal tax returns, many states provide a state tax deduction or credit for contributions made to their specific 529 plans. Delaware is one such state, offering a tax benefit to those who contribute to its sponsored education savings plan.
Deduction Amounts and Contribution Rules
Taxpayers filing as single individuals can deduct up to $1,000 in contributions annually. For married couples who file a joint tax return, this deduction limit doubles to $2,000 per year. These amounts are subtracted directly from your Delaware adjusted gross income, lowering your overall state tax liability.
To qualify for this state tax deduction, the contribution must be made to the DE529 Education Savings Plan. Contributions made to any other state’s 529 plan are not eligible for the Delaware tax deduction, even if the account owner or beneficiary is a Delaware resident.
Eligibility for the Deduction
The primary requirement to claim the tax deduction is that the contributor must be a Delaware taxpayer. However, eligibility is subject to an income limitation. The deduction is not available to individuals with a federal adjusted gross income greater than $100,000, or $200,000 for those filing a joint return.
For those who qualify, the deduction is available to the individual who makes the payment into the DE529 account. This means a parent, grandparent, or even a family friend can claim the deduction on their Delaware income tax return, as long as they made the contribution. The relationship between the contributor, the account owner, and the beneficiary does not impact eligibility for the deduction itself.
Not all money deposited into a DE529 account qualifies for the deduction. Funds that are rolled over from another state’s 529 plan into the Delaware plan are not considered deductible contributions. The deduction is for new contributions made during the tax year.
Claiming the Deduction and Recapture
Taxpayers claim the benefit by reporting it as a subtraction from their income on their Delaware state tax return. This directly reduces the amount of income subject to state tax. For example, a single filer with a Delaware adjusted gross income of $80,000 who contributes $1,000 to a DE529 account would calculate their state tax based on an income of $79,000.
The state has a “recapture” provision. If a withdrawal is made from the account for non-qualified expenses, the portion of the withdrawal that was previously deducted must be added back to the taxpayer’s Delaware income. In addition, the earnings portion of a non-qualified withdrawal is subject to state and federal income taxes, plus an additional 10% federal tax penalty.
This recapture applies only to the amounts that were actually deducted. For example, if a taxpayer contributed $2,000, deducted $1,000, and later made a non-qualified withdrawal of $2,000, only the $1,000 that generated the tax deduction would be subject to recapture and added back to their Delaware income.