How the Ohio 529 Tax Deduction Works for You
Learn how contributing to Ohio's 529 plan can lower your state tax. We explain the financial rules and long-term implications for your education savings.
A 529 plan is a savings account designed to encourage saving for future education costs. These plans offer tax benefits, and the state of Ohio provides its own incentive for residents. Contributions to a 529 plan can be deducted from your Ohio taxable income, lowering the amount of state tax you owe. This deduction is a direct way for the state to support saving for a wide range of educational paths, including four-year universities, community colleges, and trade schools.
Eligibility for the Deduction
Any Ohio taxpayer who contributes to a 529 account is eligible for the state tax deduction. You do not need to be the account owner or the beneficiary to claim it. For example, a grandparent who contributes to a child’s account can take the deduction on their own tax return, regardless of their relationship to the beneficiary. To qualify, contributions can be made to any state’s 529 plan, not just Ohio’s CollegeAdvantage plan.
Deduction Limits and Carryforward
Ohio allows taxpayers to deduct up to $4,000 in contributions per beneficiary, per year. Married taxpayers may deduct a combined maximum of $4,000 per beneficiary, regardless of whether they file jointly or separately. For instance, if a married couple contributes $5,000 to one beneficiary’s account, their total deduction for that beneficiary is capped at $4,000 for the year.
A feature of the Ohio deduction is its unlimited carryforward provision. If a taxpayer contributes more than the $4,000 annual limit for a beneficiary in one year, the excess amount can be carried forward and deducted in future tax years until the full contribution has been deducted.
To illustrate, a taxpayer who makes a single $10,000 contribution can deduct the $4,000 maximum in the first year. The remaining $6,000 is carried forward, allowing for another $4,000 deduction in the second year and the final $2,000 in the third year.
Claiming the Deduction on Your Ohio Tax Return
To claim the deduction, you must report your contributions on the Ohio Schedule of Adjustments, not the main IT 1040 form. This form is used to make various additions and subtractions to your federal adjusted gross income to arrive at your Ohio adjusted gross income.
On the schedule, you will enter your total eligible deduction for the tax year on the specific line for 529 plan contributions. This amount includes your contributions for the year up to the per-beneficiary limit, plus any carryforward amounts from prior years.
You must keep accurate records of your annual contributions and any carryforward amounts. While you do not need to submit 529 plan statements with your tax return, you must have them available to substantiate your deduction if the Ohio Department of Taxation requests documentation.
Understanding Deduction Recapture
When you withdraw money from a 529 plan for which you have claimed an Ohio deduction, it must be used for qualified higher education expenses. These include costs like tuition, fees, books, and supplies. A withdrawal for any other reason is a non-qualified withdrawal and has tax consequences related to deductions you previously claimed.
If you take a non-qualified withdrawal, any portion of it that corresponds to contributions you previously deducted must be added back to your income on your Ohio tax return. This is known as deduction recapture. The earnings portion of a non-qualified withdrawal may also be subject to income taxes and a 10% federal tax penalty.
This income addition is reported on the Ohio Schedule of Adjustments, the same form used to claim the initial deduction. This process effectively reverses the state tax benefit for any funds not used for their intended educational purpose.