Understand Your 529 State Tax Benefits

All 529 plan investors receive some tax benefits for education savings, making these accounts generally preferable to taxable alternatives.

However, the value of those benefits varies by factors such as income and contribution levels. For this reason, tax advantages are not explicitly factored into Morningstar Medalist Ratings for 529 Plans. Education savers should consider their individual tax situations, alongside the Medalist Ratings, when choosing a 529 plan.

This article will help you understand how 529 tax benefits work and provide a checklist to help you decide whether to choose an in-state 529 plan or shop around. You can also use this interactive calculator to assess your estimated tax benefits from investing in-state.

529 Federal Tax Break

Federal tax benefits for 529 plans are straightforward: Investments grow tax-free, and withdrawals for qualified education expenses are exempt from capital gains taxes. This gives 529 plans an advantage over taxable accounts.

The amount of capital gains tax savings is a function of the accountholder’s taxable income. Say a married couple regularly put money into an investment account over several years, and that amount appreciated by $10,000 by the time the beneficiary needed to take withdrawals. If the couple filed taxes jointly in 2025 and had their money in a taxable account, this $10,000 would have been reduced by:

• $2,000 (20% long-term capital gains tax) for joint filers earning over $600,050
• $1,500 (15%) for those earning between $96,700 and $600,050

Families (in this case, joint filers) who earn less than $96,700 would not have been liable for taxes on capital gains and therefore would not benefit from a federal tax break.

529 State Tax Benefits

At the state level, 529 tax benefits are more complicated but worth understanding. Depending on the state, the benefit can come in the form of a tax deduction or tax credit. We outline each benefit below.

529 Tax Benefits by State

529 State Tax Credits

Five states provide tax credits, which families can use to offset their state income taxes. These credits, on average, offer greater tax savings to a broader range of families than deductions do.

Below is a list of those five states. The values in the table assume a joint filer with an adjusted gross income of $100,000 who contributes $3,000 a year (or $250 a month) to a single account.

For our hypothetical investor, being an Indiana resident would have brought the largest tax credit. Although Indiana counts less of the contributions for tax credit than Minnesota or Oregon, the higher credit limit of $1,500 means that aggressive savers in Indiana will ultimately receive more back from the state. On the other hand, Utah employs a relatively low 4.50% contribution percentage to calculate the tax credit, so a $3,000 contribution would result in a tax credit of $135.

The three other states also offer solid tax benefits. Oregon’s maximum tax credit for joint filers is $360, which can be met with a relatively low contribution of $1,440. For those earning $100,000, the percentage of contributions eligible for the tax credit is 25%, but this percentage is higher for families with lower incomes (and the percentage is lower for families with higher incomes). Minnesota also offers larger benefits to families earning less, as it offers the option of a deduction or a more generous credit. Like Oregon, the tax credit calculation is adjusted by income level. For those earning $93,610 or less, the maximum credit of $500 can be earned with a relatively low contribution of $1,000 (where 50% of the contribution can be taken as a tax credit). Vermont taxpayers with an in-state 529 plan can receive the $500 upper limit in tax credit with a $5,000 contribution.

529 State Tax Deductions

More than 30 states and the District of Columbia allow families to deduct 529 contributions from their taxable income. For a couple earning $100,000 and contributing $3,000 annually, the annual estimated tax savings range from $48 to $255, depending on their state’s marginal tax rate.

The table below reflects our most recent information for the 2025 tax year. States’ marginal tax rates, deduction limits, and deduction basis are subject to change. We assume a joint filer with an adjusted gross income of $100,000 contributing $3,000 to a single account.

There are nuances to the tax savings figures. The District of Columbia and Minnesota offer large estimated annual tax savings for our hypothetical couple, but that is because those states have among the highest marginal tax rates for a joint filer with a $100,000 adjusted gross income. On the other hand, states like Arizona and Pennsylvania offer relatively lower tax savings for our example, but those states also have lower marginal tax rates. Moreover, these states offer deductions per beneficiary, meaning if a family is saving for more than one child, their deductions will be much higher than what’s shown in the example. Some places look unambiguously unattractive, though, such as Rhode Island, whose low tax deduction limit of $1,000 leads to a 529 investor saving just $48 a year.

Certain states provide highly generous tax benefits for aggressive savers:

• New Mexico, South Carolina, and West Virginia have no deduction limits. If the same family earning $100,000 saves $5,000 a year for each of their three kids, they can deduct $15,000 from their income, resulting in tax savings between $723 and $930.
• Of the states that have deduction limits, Pennsylvania and Colorado stand out, as they offer the highest deduction limits of $38,000 and $38,100, respectively, per beneficiary.
• Five states (Colorado, Illinois, Mississippi, Oklahoma, and Pennsylvania) have relatively high deduction limits of $20,000 to $38,100.
• Eight states (Arizona, Georgia, Kansas, Louisiana, Maryland, Ohio, Virginia, and Wisconsin) have deduction limits of $4,000 to $8,000—but this is per beneficiary, so the maximum is applied per child, not per taxpayer. So, a family with three beneficiaries can take maximum deductions of $12,000 to $24,000, depending on the state.

The nine states with no income tax—and thus no 529 deductions—are Alaska, Florida, New Hampshire (income tax applies only to interest and dividend income), Nevada, South Dakota, Tennessee, Texas, Washington (income tax applies only to capital gains income of high earners), and Wyoming.

Four states charge income tax but do not have a 529 state tax deduction: California, Hawaii, Kentucky, and North Carolina.

Bonus: 529 State Tax Parity

Nine states—Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania—offer tax parity, which means that investors can deduct their taxable income on contributions made to any plan in the US (most states allow you to take a deduction only if you invest in the state-sponsored plan).

Arkansas offers a lower $6,000 state tax deduction limit if a family invests out of state (the maximum is $10,000 when investing in-state), so there still is some incentive to invest in-state. The remaining six make no distinction between investing in or out of state.

Should You Shop Around for an Out-of-State 529 Plan?

You might want to pick a high-quality plan outside your home state if one or more of the below apply to you:

• Your state has no income tax (AK, FL, NV, NH, SD, TN, TX, WA, WY).
• Your state offers no tax benefits (CA, HI, KY, NC).
• Your state offers tax parity, letting you claim deductions for any plan (AZ, AR, KS, ME, MN, MO, MT, OH, PA).
• You contribute less than $2,000 annually.

In the first three cases, your tax outcome won’t change based on plan selection, so it’s worth prioritizing factors like fees and quality of investment options. Morningstar Medalist Ratings can aid in the shopping process—19 plans currently earn Gold or Silver ratings.

In the last case (smaller savers), even generous state tax benefits may have a limited impact on your ability to finance your beneficiary’s education. Consider shopping around for a better option, especially if your in-state plan has high fees or a Neutral/Negative rating.

Gold- and Silver-Rated 529 College Savings Plans

529 Plan Calculator: Estimate Your Federal and State Tax Benefits