Made non-qualified withdrawal from 529 plan in 2018. Included earnings as federal income & contributions as Ohio income. Ohio tax form says I can deduct earnings. True?

[jdheidmann]

I made a non-qualified 529 withdrawal in 2018.  I included the earnings portion as income on my federal taxes and added the 10% penalty.  I also included the contributions portion on my Ohio state tax return as an addition to income.  However, I am confused by the Ohio state tax treatment of earnings.  Ohio 1040 Schedule A line 31 seems to indicate that I can deduct the 529 earnings from federal adjusted gross income on my state return, implying that these earnings are not subject to Ohio state tax.  I've also found some online case studies where state tax is not applied on non-qualified 529 withdrawal earnings.  However, this approach seems like it would be a loophole on state tax treatment since state tax would be applied on earnings on an otherwise identical taxable account.  Can anyone please provide a definitive answer?  Thanks!

[jdheidmann]

Here is the Ohio State Tax reference:

Line 31 – Tuition Investments in Ohio
CollegeAdvantage Savings Plan:


"Additionally, deduct income related to an Ohio
529 savings plan that is included in federal
adjusted gross income. Such amounts may
be reported as "other income" on your federal
return."

[Hal_Al · Accepted solution]

Yes that is correct.  It's a major change from last year.

You could deduct the taxable portion in the past, but only if the  taxable portion (earnings) was  not  subject to the 10% penalty, on your federal return. Now you can deduct it, even if it is subject to penalty on the federal return.

If you want to compare the old wording, in the instructions, see page 22 at http://www.tax.ohio.gov/portals/0/forms/ohio_individual/individual/2017/PIT_IT1040_Booklet.pdf

[jdheidmann]

Thanks.  But I just got this answer from Ohio tax help center:

“If you made a non-qualified 529 withdraw that income should already be include into your federal adjusted gross income and be taxed on the state level.“ (sic)

Maybe the person is misinformed or didn’t understand my question?

It still seems strange to me that Ohio would forego taxes on non-qualified earnings, but I hope that answer is correct!

Any further help?  Thanks.

Jim

[Hal_Al]

Yep,  the person is misinformed or didn’t understand your question.  Or, like you and me, he though that the concept was so stupid, that it couldn't possibly be true.

Yep, it seems strange to me that Ohio would forego taxes on income the feds are already taxing. But tax rules are politically motivated. I'm of the opinion that the Ohio 529 plan is simply a favorite with the politicians in Columbus (note the doubling of the contribution deduction).

I was quite flabbergasted when I first  read your quote from the Ohio instruction booklet. But clearly, that's what they intended. One though I had was that the change was for simplicity. It was complicated, before, on what qualified for the deduction. Now it isn't complicated.