Do 529 Contributions Reduce Adjusted Gross Income?

Contributions to a 529 education savings plan do not reduce your federal adjusted gross income (AGI). These contributions are made with after-tax dollars, meaning you have already paid federal income tax on the money. The primary federal tax advantages are tax-deferred growth and tax-free withdrawals for qualified expenses, not an upfront deduction.

Many states, however, offer an income tax deduction or credit for 529 contributions. This benefit reduces your state taxable income, even though it does not affect your federal AGI. A 529 plan, named after Section 529 of the Internal Revenue Code, is an investment account designed to encourage saving for future education costs.

Federal Tax Treatment of 529 Contributions

A primary federal benefit is tax-deferred growth. Any earnings generated from the investments within the 529 account, such as interest, dividends, or capital gains, are not subject to federal income tax on an annual basis. This allows the account’s value to compound more rapidly than it would in a taxable brokerage account.

Another benefit is that withdrawals are entirely tax-free, provided the money is used for Qualified Education Expenses (QEEs). These expenses include tuition, fees, books, required supplies, and room and board for students enrolled at least half-time. The definition also covers computer equipment and internet access used by the beneficiary during enrollment.

The SECURE 2.0 Act introduced a provision for beneficiaries to roll over funds from a 529 plan to a Roth IRA without incurring taxes or penalties. This rollover is subject to a lifetime limit of $35,000, and the 529 account must have been open for at least 15 years. This provision offers a solution for leftover funds if the beneficiary does not pursue higher education or has remaining assets in the account.

State Tax Deductions for 529 Contributions

More than 30 states provide an income tax deduction or a tax credit for contributions to a 529 plan. This incentive lowers your state taxable income, resulting in a lower state tax bill for the year you contribute. The value of this benefit depends on your state’s income tax rates and the amount you contribute.

The rules governing these deductions vary widely from one state to another. Many states require that to receive a deduction, residents must contribute to the plan sponsored by that specific state. This policy encourages residents to invest in their home state’s program.

Conversely, a few states are “tax-neutral,” allowing their residents to claim a tax deduction for contributions made to any state’s 529 plan. This provides savers with the flexibility to choose an out-of-state plan that may offer better investment options or lower fees while still receiving a local tax benefit. States without an income tax do not offer this type of incentive.

States also impose annual limits on the amount of contributions that are eligible for a deduction or credit. For example, a state might cap the deductible amount at $5,000 for an individual filer and $10,000 for a married couple filing jointly. Some states offer much higher deduction limits, so you must verify the regulations for your state of residence.

Contribution Limits and Gift Tax Rules

While there are no federal limits on how much you can contribute to a 529 plan annually, contributions are considered completed gifts for federal gift tax purposes, meaning large contributions can have tax implications. The primary constraint is the annual gift tax exclusion, which for 2025 is $19,000 per individual, per recipient.

An individual can contribute up to $19,000 to a beneficiary’s 529 plan in a single year without using their lifetime gift tax exemption or filing a federal gift tax return (Form 709). A married couple can combine their exclusions to gift up to $38,000 to the same beneficiary in one year.

A feature of 529 plans is the ability to “superfund” an account. This rule allows a contributor to make five years’ worth of contributions in a single year while still qualifying for the annual gift tax exclusion. Using the 2025 exclusion amount, an individual could contribute up to $95,000 ($19,000 x 5) to a beneficiary’s 529 plan at one time.

To use this provision, the contributor must file a Form 709 for the year of the contribution to make the five-year election. This treats the large contribution as if it were made evenly over five years. The donor cannot make any additional gifts to that same beneficiary during that five-year window without potentially triggering gift tax consequences.