How Does the Louisiana 529 Plan Tax Deduction Work?
Navigate the rules for Louisiana's 529 plan tax deduction. Learn how contributions reduce your state tax liability and the long-term impact of withdrawals.
The Louisiana Student Tuition Assistance and Revenue Trust (START) Saving Program is the state’s 529 plan, designed to help families save for education costs. A primary benefit for state residents is the ability to deduct contributions from their Louisiana state income taxes, which lowers their taxable income. The program is structured under Section 529 of the Internal Revenue Code, allowing for tax-advantaged savings for education.
Eligibility Requirements for the Deduction
To open a Louisiana START Saving Program account, either the account owner or the beneficiary must be a Louisiana resident when the account is established. Continued residency is not required after the account is opened. The state income tax deduction is exclusively for contributions made to the Louisiana START Saving Program; funds contributed to another state’s 529 plan are not eligible.
Any Louisiana taxpayer can open an account and make deductible contributions. This includes parents, grandparents, other relatives, or friends of the designated beneficiary. An individual can also open an account for themselves to save for their own future educational pursuits.
Understanding Contribution and Deduction Limits
The Louisiana START program limits the amount that can be deducted annually. An individual filing a single tax return can deduct up to $2,400 per year for each beneficiary account. For married couples filing a joint return, this limit is $4,800 per year per beneficiary. For instance, a married couple with two children, each with a START account, could deduct up to $9,600 in a single tax year.
The plan allows for the carry forward of excess contributions. If a taxpayer contributes more than the annual deductible amount, the overage can be applied as a deduction in subsequent tax years until the full amount is claimed. For example, if a single filer contributes $5,000 to one account, they can deduct $2,400 in the current year and carry the remaining $2,600 forward to be deducted in a future year.
The START program also offers “Earnings Enhancements,” a state-funded match on contributions. The matching percentage is based on the account owner’s federal adjusted gross income and can range from 2% to 14% of the deposited amount. Account owners with a federal adjusted gross income under $30,000 receive a 14% match, while those with an income of $100,000 or more receive a 2% match.
Funds rolled into the START program from another state’s 529 plan or a different savings vehicle do not qualify for the Louisiana tax deduction. The deadline to make a contribution that can be deducted on a given year’s tax return is December 31.
How to Claim the Deduction on Your Louisiana Tax Return
To claim the deduction, you will need the annual contribution statement from the Louisiana START Saving Program. This document serves as proof of the total amount you deposited during the tax year and is needed to substantiate your claim with the Louisiana Department of Revenue.
The deduction is reported on Louisiana Schedule E, “Adjustments to Income.” Taxpayers must enter their total eligible contributions for the year on the line designated for “Louisiana Student Tuition Assistance and Revenue Trust (START) Program Contributions,” up to the maximum allowed limit.
After entering the deductible amount on Schedule E, the total adjustments are transferred to the main Louisiana Resident Income Tax Return, form IT-540. This adjustment reduces your Louisiana adjusted gross income, which lowers your overall state tax liability.
Tax Consequences of Plan Withdrawals
The tax implications of withdrawing funds from a START account depend on how the money is used. Withdrawals for qualified higher education expenses are tax-free at both the federal and Louisiana state levels. Qualified expenses include tuition, fees, books, supplies, equipment, and room and board for a student at an eligible institution.
A withdrawal for any reason other than qualified education expenses is a non-qualified withdrawal. The earnings portion of a non-qualified withdrawal is subject to federal income tax and a 10% federal tax penalty. The original contributions are returned without tax or penalty.
Louisiana also imposes a “deduction recapture” for non-qualified withdrawals. If you take a non-qualified withdrawal, you must add a portion of previously claimed tax deductions back to your income. The amount added back is the lesser of the non-qualified withdrawal amount or the total of all START deductions claimed in prior years. This reverses the initial tax benefit, subjecting that amount to Louisiana income tax in the year of the withdrawal.