If your state is one of those states that has a 529 plan deduction, TurboTax will prompt you to enter your 529 contributions when you get to the credits/deductions portion of your state tax interview.
Your contribution isn’t tax-deductible on your federal return, but two-thirds of the states do offer an income-tax deduction for contributions. Most require that you contribute to your own state’s plan to get the break (Arizona, Kansas, Maine, Missouri and Pennsylvania allow deductions for contributions to any state’s plan). But each state also has different rules about who can take the deduction for their contributions.
529 plans are tax-advantaged savings plan named after Section 529 of the Internal Revenue Code. The intention of 529 plans is to encourage college savings. Every state and the District of Columbia, and even some educational institutions sponsor a 529 plan. There are two types of 529 plans: college savings plans and pre-paid tuition plans. Investment options, expenses and other specifics vary from state to state.
Pre-paid tuition plans
While states can offer both types of 529 plans, educational institutions can only offer pre-paid tuition plans. With a pre-paid tuition plan, you are effectively purchasing a future education at an in-state public institution at current prices. In some cases, you can also pre-purchase room and board expenses. State governments typically guarantee investments in pre-paid tuition plans, and require either the owner or the beneficiary to be a resident to benefit from the plan.
College savings plans
Your contributions to a college savings plan function somewhat like an Individual Retirement Account. In a college savings plan, the investments you choose are subject to market risk with no guarantee that it will increase in value.
When the student is ready to use the funds for school, you can make tax free withdrawals up to the amount of qualified education expenses. College savings plans typically have fewer limitations in terms of the age or residency of the account owner or beneficiary and does not restrict your use of the funds to schools within your state. Additionally, college savings plans generally have more varied investment choices.
