What Is the Michigan 529 Tax Deduction?

A 529 plan is a savings account, named after Section 529 of the Internal Revenue Code, that helps people save for future education costs. While these plans offer federal tax-free growth and withdrawals for qualified expenses, Michigan provides an additional benefit. The state gives taxpayers an income tax deduction for contributions made to eligible 529 plans.

Eligibility for the Michigan Deduction

Michigan allows taxpayers to deduct contributions to a 529 education savings plan from their Michigan adjusted gross income. For a single individual or someone married filing separately, the maximum annual deduction is $5,000. For a married couple filing a joint tax return, this limit is $10,000 per year. This is a deduction, which reduces your total taxable income, not a tax credit, which reduces your tax liability.

A feature of Michigan’s tax deduction is its flexibility. Any Michigan taxpayer who contributes to a 529 plan can be eligible for the deduction, not just the account owner. This means a grandparent, other relative, or friend in Michigan who contributes to a student’s 529 account can claim the deduction on their own tax return, subject to the annual limits.

The state’s tax deduction is available only for contributions to a Michigan-sponsored 529 plan, like the Michigan Education Savings Program (MESP). Michigan does not offer a deduction for contributions made to out-of-state plans. Contributions resulting from a rollover from another 529 plan are also not eligible for this deduction.

Claiming the Deduction on Your Tax Return

To claim the deduction for your 529 plan contributions, you must report it on the appropriate form when filing your annual Michigan income tax return. The specific form is Michigan Schedule 1, Additions and Subtractions. This schedule is used to report adjustments to your federal adjusted gross income (AGI) to calculate your Michigan taxable income.

Within Schedule 1, you will find a “Subtractions from Income” section where you report your eligible 529 contributions for the tax year. You must locate the specific line designated for “Michigan Education Savings Program (MESP) and MI 529 Plan” contributions and enter the total amount you contributed, up to the legal maximum.

You should keep the annual contribution statements provided by your 529 plan administrator. These documents serve as official proof of the amounts and dates of your contributions. While you do not need to submit these statements with your tax return, you must have them available if the Michigan Department of Treasury requests verification.

Understanding Deduction Recapture

After claiming a deduction for 529 plan contributions, you may have to pay the tax benefit back through a process known as deduction recapture. In Michigan, this is triggered by a non-qualified withdrawal, which is any distribution from the 529 account not used for qualified higher education expenses, such as tuition, fees, or books.

If you make a non-qualified withdrawal, the amount for which you previously claimed a deduction must be added back to your Michigan income, reversing the prior tax benefit. Additionally, the earnings portion of that withdrawal is subject to both state and federal income tax, along with a 10% federal penalty tax on those earnings.

To report a recaptured amount, you must use Michigan Schedule 1. Instead of entering the amount as a subtraction, you will report it in the “Additions to Income” section, increasing your total taxable income for that year.