The Illinois 529 Tax Deduction: How It Works

A 529 savings plan is a specialized investment account designed to help families set aside funds for future education costs with tax advantages. While these plans exist nationwide, Illinois offers a specific benefit to its residents: a state income tax deduction for contributions. This deduction directly reduces a taxpayer’s adjusted gross income on their Illinois tax return, providing an immediate financial incentive for saving for higher education.

Eligibility for the Deduction

To qualify for the Illinois 529 tax deduction, the requirements pertain to both the person making the contribution and the specific plan receiving the funds. Any individual who files an Illinois income tax return and contributes to a qualifying plan is eligible to take the deduction. This is not limited to parents; grandparents, other relatives, and even friends can claim the deduction on their own Illinois tax returns for contributions they make.

The deduction is exclusively for contributions made to Illinois-sponsored 529 plans. These plans are the Bright Start College Savings Program, which is a direct-sold plan, and the Bright Directions Advisor-Guided 529 College Savings Program. Contributions made to a 529 plan sponsored by any other state, even if the beneficiary is an Illinois resident, do not qualify for the Illinois income tax deduction.

Contribution Rules and Deduction Limits

An individual taxpayer, or a married person filing a separate return, can deduct up to $10,000 in total contributions annually. For married couples who file a joint Illinois tax return, the maximum annual deduction is increased to $20,000. These limits apply to the total combined contributions made to all eligible Illinois 529 plans during the tax year.

Funds moved from another state’s 529 plan into a qualifying Illinois plan are considered a rollover, not a new contribution. Rollovers are not eligible for the Illinois state income tax deduction, as the tax benefit is intended to incentivize new savings within the state’s own plans.

Claiming the Deduction on Your Tax Return

To claim the deduction, taxpayers report their contribution amount on Illinois Schedule M, “Additions and Subtractions for Individuals.” This form is filed along with the main Illinois income tax return, Form IL-1040.

On Schedule M, you will find a specific line designated for subtractions related to educational savings. The taxpayer must enter the total amount of their contributions for the tax year on the line for “Contributions to an Illinois 529 College Savings Plan.”

The 529 plan administrator for both Bright Start and Bright Directions provides account statements that document all contribution activity for the year. These documents serve as the necessary proof of the amount contributed and should be retained with your tax records.

Deduction Recapture for Non-Qualified Withdrawals

The tax deduction for 529 plan contributions is provided with the expectation that the funds will be used for their intended purpose: qualified education expenses. If a withdrawal is made from an Illinois 529 plan for a reason other than qualified education costs, a rule known as “deduction recapture” is triggered. This means any part of that non-qualified withdrawal that was previously deducted from Illinois income must be paid back.

The recaptured amount is reported as an “addition” to income on the Illinois Schedule M in the year the non-qualified withdrawal occurs. For example, if a taxpayer took a $5,000 deduction for a contribution and later withdrew that same $5,000 for a non-qualified purpose, they would have to add $5,000 back to their Illinois adjusted gross income. This can result in a higher tax liability than the savings originally realized, especially if the taxpayer is in a higher tax bracket in the year of the withdrawal.