How to Claim the SC 529 Tax Deduction on Your State Return

Saving for education can be more affordable with a 529 plan, and South Carolina offers a tax deduction to encourage contributions. This benefit allows residents to reduce their taxable income, making it an attractive option for families planning for college expenses. Understanding the eligibility requirements, contribution limits, and filing procedures ensures you maximize savings while staying compliant with state tax laws.

Eligibility Criteria

South Carolina residents who contribute to the state’s Future Scholar 529 College Savings Plan can deduct the full amount from their state taxable income. Contributions to out-of-state 529 plans do not qualify. The account owner—typically a parent or grandparent—can claim the deduction, even if someone else makes the contribution.

The beneficiary must have a valid Social Security number or taxpayer identification number. There are no income restrictions for contributors, and no age limit for the beneficiary, allowing funds to be used for college tuition, K-12 tuition (up to $10,000 per year), and certain apprenticeship programs.

Contribution Limits

South Carolina allows taxpayers to deduct the full amount contributed to a Future Scholar 529 Plan, with no annual cap. Whether a contributor deposits $1,000 or $100,000 in a given year, the entire amount can be deducted from state taxable income.

While the state does not impose an annual limit for tax deduction purposes, the 529 plan itself follows federal guidelines that cap total account balances. As of 2024, the maximum balance for a Future Scholar 529 account is $540,000 per beneficiary. Once this limit is reached, no additional contributions can be made, though earnings can continue to grow tax-free.

For large contributions, federal gift tax rules apply. In 2024, individuals can contribute up to $18,000 per beneficiary without triggering the federal gift tax. A special provision, known as “superfunding,” allows contributors to front-load five years’ worth of gifts, enabling a lump sum of up to $90,000 in a single year without gift tax consequences.

Claiming on State Returns

To deduct contributions on a South Carolina state income tax return, taxpayers must report them on Form SC1040 under adjustments to income. The deduction directly reduces taxable income, lowering state tax liability.

Proper documentation is necessary in case of an audit. Contributors should keep year-end account statements from the 529 plan provider showing total contributions. While these documents do not need to be submitted with the return, the South Carolina Department of Revenue may request them for verification. Only the account owner can claim the deduction.

Electronic filing software typically includes prompts for 529 contributions, simplifying the process. If filing manually, taxpayers should review state-specific instructions to ensure the deduction is correctly applied. Errors such as entering contributions in the wrong section or failing to account for rollovers from other 529 plans can lead to processing delays or lost deductions.

Filing Errors

A common mistake is confusing contributions with investment earnings. Only the amount directly contributed during the tax year qualifies for the deduction. Any growth from market performance remains tax-deferred but is not deductible. Misreporting this can inflate the deduction and may trigger an audit or require an amended return.

Another issue arises when taxpayers attempt to deduct contributions made in a different tax year. South Carolina follows a calendar-year basis, meaning only funds deposited between January 1 and December 31 of the filing year can be claimed. Contributions made in early January cannot be applied to the previous year’s return. To avoid this, account holders should check processing times with their 529 plan provider, as contributions made near year-end may not post until the following year.