How to Claim the DC 529 Tax Deduction
Contributing to the DC 529 plan can lower your state tax liability. Learn the specific requirements and procedures for accurately claiming this valuable deduction.
A 529 plan is a tax-advantaged savings account designed for future education costs. The District of Columbia provides a tax deduction for residents who contribute to its designated 529 plan, which lowers their taxable income for the year. Understanding how to utilize this benefit involves knowing the specific rules set by the District.
Eligibility for the DC Deduction
To qualify for the tax deduction, you must be a District of Columbia resident who files a DC income tax return. This local benefit does not apply to federal tax returns and is based on your residency status during the tax year for which you are filing.
The deduction is exclusively for contributions made to the DC College Savings Plan. While you can contribute to any state’s 529 plan, only contributions to the official DC plan qualify for the DC tax deduction. Contributions to plans from other states, like Virginia or Maryland, are not eligible, and rollovers from another state’s plan do not qualify for the deduction.
The person claiming the deduction must be the owner of the account. If a grandparent or other relative contributes to an account owned by a parent, the parent, as the account owner, is the one who can claim the deduction, not the contributor.
Contribution Limits and Deduction Amounts
The District of Columbia limits the amount you can deduct for contributions to the DC College Savings Plan. An individual taxpayer, including those filing as single or head of household, can deduct up to $4,000 per year.
For married couples filing a joint tax return, the deduction limit is $8,000. To claim the full amount, each spouse must have their own separate DC College Savings Plan account and contribute to it. The beneficiary on both accounts can be the same child.
If your contributions exceed the annual deduction limit, the excess amount can be carried forward and deducted in subsequent tax years for up to five years. For example, if a single filer contributes $10,000 in one year, they can deduct $4,000 that year. The remaining $6,000 can be carried forward, allowing for a $4,000 deduction in the second year and a $2,000 deduction in the third.
Information and Documentation for Claiming the Deduction
To claim the deduction, you will need the total amount of your contributions made to the DC College Savings Plan between January 1 and December 31 of the tax year. You are also responsible for tracking any carryforward amounts from previous years if your prior contributions exceeded the annual limit.
Your year-end account statement from the DC College Savings Plan serves as the official record of your contributions. These statements are usually available through your online account portal early in the tax season. You should download and save a copy for your records.
How to Claim the Deduction on Your DC Tax Return
The deduction is claimed on your DC Individual Income Tax Return, Form D-40. You must first complete Schedule I, “Additions to and Subtractions from Federal Adjusted Gross Income.” On this schedule, you will find a specific line to report your contributions to the DC College Savings Plan.
On the designated line, enter your total contributions for the year plus any available carryforward amount. The total entered cannot exceed the annual limit of $4,000 for an individual or $8,000 for a married couple filing jointly.
After completing Schedule I, the total subtraction amount is transferred to Form D-40. This reduces your federal adjusted gross income to determine your final DC taxable income.
Understanding Deduction Recapture
If you receive a tax deduction and do not use the funds as intended, the District of Columbia may require you to pay it back through a process called deduction recapture. Recapture is triggered if you roll over funds to another state’s 529 plan within two years of opening the account or if you take a non-qualified withdrawal.
A non-qualified withdrawal is any distribution not used for education costs like tuition, fees, books, and certain room and board. The earnings portion of such a withdrawal is subject to federal and state income taxes, plus a 10% federal penalty. Additionally, any part of the withdrawal from contributions you previously deducted must be added back to your income on your DC tax return.
This recaptured amount is reported as an “addition to income” on your tax return for the year the withdrawal was made, which increases your DC taxable income.