How the Indiana 529 Tax Credit Works

The Indiana 529 tax credit is a state-level incentive that provides a direct reduction in state tax liability for contributions made to a qualified education savings plan. The program’s purpose is to encourage residents to save for college and other post-secondary training. This state credit operates separately from any federal tax advantages associated with 529 plans.

Eligibility and Credit Calculation

Any Indiana taxpayer who contributes to an Indiana-sponsored CollegeChoice 529 Direct Savings Plan is eligible to claim the tax credit. This includes parents, grandparents, or any other individual who makes a contribution, regardless of whether they are the account owner. Contributions made to 529 plans from other states do not qualify for the Indiana tax credit.

The credit is calculated as 20% of the total contributions made during the tax year. For the current tax year, the maximum contribution amount that qualifies for the credit is $7,500. This results in a maximum possible credit of $1,500 per tax return for both single filers and those who are married filing jointly.

For married couples who file separately, the maximum credit is $750 each, which corresponds to a maximum eligible contribution of $3,750 per person. The credit is non-refundable, meaning it can reduce a taxpayer’s liability to zero, but no excess amount will be paid out as a refund. Any unused portion of the credit in a given year cannot be carried back or forward to other tax years.

Making Qualifying Contributions

To qualify for the tax credit in a specific tax year, contributions must be made by the tax filing deadline of the following year. For example, a contribution for the 2024 tax year can be made until the filing deadline in 2025.

Claiming the Credit on Your Tax Return

To claim the credit, a taxpayer must complete and attach Indiana Schedule IN-529, Credit for Contributions to a CollegeChoice 529 Education Savings Plan, to their annual state income tax return. This form requires the contributor’s name and Social Security number, the beneficiary’s name and Social Security number, and the total amount of contributions made during the tax year.

Once Schedule IN-529 is completed, the calculated credit amount is transferred to the main Indiana individual income tax return, Form IT-40. The credit is then applied against the taxpayer’s total state tax liability. Retain records of all contributions, such as bank statements or contribution confirmations, as the Indiana Department of Revenue may request proof of the amounts claimed.

Special Considerations

Indiana law includes a provision for carrying forward excess contributions. If a taxpayer contributes more than the $7,500 annual maximum, the excess amount can be carried forward and used to claim the credit in subsequent tax years. For example, a contribution of $10,000 in one year would allow for the maximum $1,500 credit in that year, with the remaining $2,500 eligible for a $500 credit in the following year. This allows contributors to benefit from larger, lump-sum contributions over time.

Indiana law includes a credit recapture provision. If funds are withdrawn from a CollegeChoice 529 plan for non-qualified expenses, any tax credits previously claimed on those contributions must be repaid to the state. This recapture is triggered by non-qualified withdrawals, including rollovers to another state’s 529 plan, withdrawals for K-12 tuition at a school outside of Indiana, and payments for qualified education loans. A rollover to a Roth IRA, while permitted under federal rules, is also considered a non-qualified withdrawal for Indiana purposes and will trigger recapture. The recapture amount is reported on Schedule IN-529R.