Illinois Bright Start Tax Deduction: How to Claim and Maximize Benefits

Saving for college can be challenging, but Illinois offers a tax incentive to help families. The Bright Start 529 plan allows residents to deduct contributions from their state taxable income, reducing their tax burden while investing in education.

Who Can Claim the Deduction

Illinois residents who own a Bright Start 529 account can deduct their contributions from state taxable income. Only the account owner—the primary holder—can claim this benefit. While others, such as grandparents, may contribute, they cannot deduct those contributions unless they own the account.

Married couples filing jointly can each claim the deduction if both contribute to a Bright Start account. Each spouse can deduct up to the maximum limit separately, provided they have taxable income in Illinois.

Businesses and trusts are not eligible for the deduction, as it is designed for individual taxpayers. Non-residents who contribute to an Illinois 529 plan also do not qualify, even if the beneficiary lives in Illinois.

Contribution Limit for State Deduction

For the 2024 tax year, Illinois allows individuals to deduct up to $10,000 in Bright Start 529 contributions, while married couples filing jointly can deduct up to $20,000. These limits apply per taxpayer, meaning contributions across multiple accounts cannot exceed the cap per filer.

Contributions must be made by December 31 of the tax year. Unlike some federal deductions that allow retroactive contributions, Illinois enforces a strict calendar-year deadline.

Since Illinois has a flat income tax rate of 4.95%, a single filer contributing the maximum $10,000 would save approximately $495 in state taxes, while a married couple contributing $20,000 would save around $990.

Qualified Expense Categories

Funds from a Bright Start 529 plan must be used for qualified higher education expenses to maintain tax advantages. These include tuition, mandatory fees, and room and board for students enrolled at least half-time, though room and board costs cannot exceed the school’s published cost of attendance.

Books, supplies, and equipment required for coursework qualify, but general purchases—such as dorm decorations—do not. Computers, software, and internet access are eligible if used primarily for education.

Recent changes allow funds to cover registered apprenticeship programs and student loan repayments, though loan payments are capped at a lifetime limit of $10,000 per beneficiary.

Claiming on State Tax Returns

Illinois taxpayers must report Bright Start 529 contributions on Schedule M of the IL-1040 state income tax return. The deduction amount must match total contributions made during the tax year, up to the allowable limit. Taxpayers should keep records, such as bank statements and confirmation receipts, as the Illinois Department of Revenue may request documentation during an audit.

Only contributions made with after-tax dollars qualify. If a taxpayer receives a refund from the 529 plan due to overpayment of tuition or other qualified expenses, the refunded amount must be recontributed within 60 days to maintain the tax benefit. Otherwise, it must be added back to taxable income.

Rollover Factors

Illinois allows rollovers into a Bright Start 529 account from another state’s plan, and these contributions qualify for the state tax deduction if treated as new deposits. However, the IRS permits only one tax-free rollover per beneficiary within a 12-month period. Multiple rollovers within a year may trigger federal tax liabilities and penalties.

If funds are rolled over from an Illinois 529 plan to an out-of-state plan, any previously deducted contributions must be added back to Illinois taxable income. This recapture rule applies regardless of how long the funds were held in the Illinois plan. Before switching, account holders should weigh potential investment benefits against the loss of the Illinois tax deduction.

Non-Qualified Distribution Considerations

Using Bright Start 529 funds for non-qualified expenses results in tax penalties and additional income tax liability. The earnings portion of a non-qualified withdrawal is subject to federal income tax and a 10% penalty. Illinois also requires taxpayers to add back any previously deducted contributions associated with the withdrawal.

Exceptions exist if the beneficiary receives a scholarship, attends a U.S. military academy, or becomes disabled. In these cases, the 10% federal penalty is waived, though the earnings portion remains taxable.

To avoid penalties, account holders can transfer excess funds to another eligible beneficiary within the same family. 529 plans allow tax-free beneficiary changes, providing flexibility in managing unused funds.