Indiana 529 Deduction: Claiming the State Tax Credit

A 529 plan is a tax-advantaged savings vehicle designed to encourage saving for future education costs. These plans, legally known as “qualified tuition programs,” are sponsored by states, state agencies, or educational institutions. Indiana provides a state-level tax incentive to encourage residents to save for education, which can be a valuable tool in financial planning for these future expenses. This benefit directly reduces a taxpayer’s state tax liability.

Eligibility for the Deduction

Indiana offers its taxpayers a non-refundable tax credit for their contributions. This credit is calculated as 20% of the total contributions made during the tax year. The credit is capped at $1,500 per return for single filers and married couples filing jointly, which corresponds to a maximum eligible contribution of $7,500. This cap was raised from $1,000 in 2023. For married couples who choose to file separately, the maximum credit is $750 each.

A feature of the Indiana credit is that any taxpayer who contributes to a qualifying plan can claim it, not just the account owner. For instance, a grandparent who contributes to their grandchild’s 529 account is eligible to claim the state tax credit on their own Indiana tax return, provided they are an Indiana resident.

The state also provides a carryforward provision for contributions that exceed the annual limit. If a taxpayer contributes more than the amount that qualifies for the maximum credit in a single year, the excess amount can be carried forward and applied to future tax years.

Qualifying Plans and Contributions

To qualify for the Indiana credit, contributions must be made to the Indiana CollegeChoice 529 Direct Savings Plan. Contributions to 529 plans sponsored by other states are not eligible for this specific state tax benefit, a detail that distinguishes Indiana from states that offer a credit for any state’s plan.

A qualifying contribution is a cash deposit made via check, electronic funds transfer, or payroll deduction. Rollovers from another state’s 529 plan or transfers from other savings accounts, such as a Coverdell Education Savings Account, do not qualify for the Indiana tax credit. The credit is specifically designed to incentivize new money being saved for education within the state’s designated plan.

Claiming the Deduction on Your Indiana Tax Return

To claim the CollegeChoice 529 Plan Credit, a taxpayer must complete and file Schedule IN-529 with their annual Indiana income tax return. This form must be attached to the primary state tax form, which is typically Form IT-40 for full-year residents.

On Schedule IN-529, you will need to provide specific details for each contribution. This includes the account number of the 529 plan, the name of the beneficiary, and the total amount you contributed during the tax year.

Once the credit amount is calculated on Schedule IN-529, the final figure is transferred to the appropriate line on the main state tax return’s schedule of credits. For those filing Form IT-40, this credit is entered on Schedule 6.

Deduction Recapture for Non-Qualified Withdrawals

Taxpayers who have previously claimed the Indiana 529 tax credit must be aware of the state’s “recapture” provision. If you take a non-qualified withdrawal from the 529 account, you may be required to repay the tax credit you previously received. A non-qualified withdrawal is any distribution not used for qualified higher education expenses, such as tuition, fees, books, and certain room and board costs.

The recapture rule requires the account owner to add back a portion of the previously claimed credit to their state tax liability in the year the non-qualified withdrawal is made. This is reported on Schedule IN-529R, the Recapture of Indiana’s CollegeChoice 529 Education Savings Plan Credit. The amount to be recaptured is generally calculated as 20% of the non-qualified withdrawal, up to the total amount of credits previously claimed on that account.

Specific events trigger this recapture, including rolling over funds to another state’s 529 plan or taking a distribution to pay for K-12 tuition at a school outside of Indiana. While rollovers from a 529 account to a Roth IRA are free from federal tax and penalties, Indiana considers these to be non-qualified distributions. This will trigger the recapture of any state tax credit previously claimed on those funds and underscores the state’s intent to have the savings used for their intended educational purposes.